Boards should not act as ‘rubber stamp of approval’; effective challenge vital to Consumer Duty board reports, according to FCA

The FCA recently published the findings of its review into firms’ approach to the first annual Consumer Duty board report, which highlights good and poor practice relating to firms’ approach to tracking consumer outcomes, acting on insight and the role of senior manager and stakeholders in challenging and driving improvements required to deliver the Duty.

Under the Consumer Duty, implemented in 2023, firms must now prepare an annual report setting out how they have complied with the rules. Good practice observed by the FCA in the first set of reports included:

• A clear focus on the four Consumer Duty outcomes; with dedicated sections for each which defined good outcomes for customers and products.
• Good quality data; commentary on good outcomes supported by good quality MI that backed up firm conclusions.
• Analysis of different customer types; including those with vulnerable characteristics.
• Clear processes for production of the report; with processes for producing reports for governing bodies to review and approve within necessary timeframes.
• A focus on culture throughout the firm; commentary emphasising companies’ commitment to effectively implementing the duty.

However, the FCA also recommended areas for improvement, including:

• Better quality data; some firms had insufficient data to justify conclusions or assure governing bodies firms were meeting obligations under the Duty. Some did not provide adequate explanation alongside MI to clearly evidence good customer outcomes.
• Comprehensive view across distribution chain; lack of evidence that relevant information was shared between firms and third parties across the distribution chain.
• Analysis of different customer types; lack of evidence that firms had adequately considered outcomes for different customer groups, including those with characteristics of vulnerability.
• Challenge from the board; lack of evidence of effective challenge from firms’ governing bodies on report contents.
• Taking effective action: Some action plans and improvements not accompanied by timescales, action owners, and clarity on the data used to evidence good outcomes.

Call for boards to sufficiently challenge report contents

In its review of board reports, the FCA emphasised that “effective challenge is essential for the board to ensure that the report evidences the firm’s compliance with its obligations under the duty.”

Furthermore, the regulator stressed the importance of reports being produced with input from key, relevant business areas, forums and committees, and receiving adequate scrutiny by stakeholders with relevant expertise to ensure that there is clear accountability and ownership when addressing issues and that boards do not operate as a sole layer of approval.

Ultimately, the regulator underscored that boards should not function as a ‘rubber stamp’ of approval; the reports should receive adequate challenge and critical review to ensure any data and insight provided within effectively demonstrates that the firm is ensuring customers receive good outcomes and that any issues are identified and followed by clear, robust actions to remedy them.

The FCA noted good practice in firms who included the details of board challenges, either in the report or appending board minutes, examples of which included:

• Requests for further information, or demonstration of, compliance with the four outcomes, i.e., request for further details on target markets or firm user research testing to understand how work on products and services and consumer understanding contributed to good outcomes.
• Challenge to provide a clear plan to address issues regarding customers with characteristics of vulnerability where a board member felt current plans would not resolve the issue. A clear action was assigned to a senior manager to overcome this challenge and allocated.

However, the FCA also noted that some reports included poor quality data or obscure data sources to track outcomes or failed to delineate good outcomes or establish justifiable thresholds to measure outcomes alongside MI reports. Therefore, whilst it is vital that boards challenge information provided to scrutinise its value as evidence of compliance with the Duty, poor use of MI to monitor and analyse outcomes and customer groups could make it difficult for boards to gain an accurate picture and offer adequate challenge.

As the FCA notes in its report, “[t]he best reports were structured in a way that made them easy for their boards to scrutinise the key elements that the rules and guidance suggest they should cover”, suggesting firms should aim to compile reports in a way that supports board challenge by providing a clear, transparent analysis of firms’ efforts to further good outcomes and comply with the Duty.