Consumer Duty board reports: good practice and areas for improvement

The FCA have updated their good practice and areas for improvement webpage with extra insight on how smaller firms can meet the requirements.

The key points are:

• The FCA want smaller firms to feel confident in delivering the Duty via a proportionate approach based on their size and activities.

• They found areas of good practice from firms of all sizes and as such, much of the good practice cited applies to firms of all sizes: all firms should be able to monitor customer outcomes, take actions and implement a business strategy aligned to the Duty to achieve good outcomes.

• The FCA are analysing feedback for a sector-specific directory-style guide with examples of good and poor practice in the credit broking sector.

Report Governance

The FCA is aware that governance considerations differ considerably depending on scale, so good practice and areas for improvement regarding 2LOD and 3LOD may not apply tosmaller firms. Instead, smaller firms might consider asking a ‘critical friend’ with sufficient understanding of the Duty to provide impartial feedback on a firm’s approach and report.

Monitoring and outcomes

The FCA have found that some smaller firms took a proportionate – but effective – approach to delivering good outcomes. Even when adopting a proportionate approach, reports should clearly explain what data or evidence has been used to assess outcomes.

Alternative, proportionate, approaches to monitor outcomes also worked well, for example, using low-cost website analytics to track where customers drop out of an application journey. Where firms saw higher drop-off rates on pages about fees, one firm simplified the language and layout and added infographics and a short set of FAQs, which led to higher completion rates, suggesting a better customer experience and clearer understanding of costs.

A smaller firm addressed the lack of a commercial benchmarking tool by joining a trade body working group. By comparing anonymized data, the firm identified low post-sale engagement and introduced quarterly updated emails, which led to improved customer feedback.

Analysis of different customer types, including those with characteristics of vulnerability

A smaller firm reviewed repayment and customer satisfaction for one of its loan products. It found that some customers who repaid early were still charged a flat fee that did not represent fair value. The firm changed its fee structure to a pro-rata approach, which led to positive customer feedback and improved customer retention.

Comprehensive view across distribution chains

Smaller firms can face challenges in showing effective oversight of third-party relationships. They should be able to show that they have taken appropriate steps to communicate with relevant parties further up and down the distribution chain where needed.

Areas for improvement: products and services

The FCA’s concern around failure to provide the board with much information on target markets, detail on how they were determined or oversight of target markets for some of the main products and services could be mitigated by smaller firms through using practical insights, such as adviser experience or customer feedback, to inform their understanding of their customer base and fill gaps where more formal analysis is limited or too costly to feasibly obtain.

Areas for improvement: Analysis of different customer types, including those with characteristics of vulnerability

The FCA understand that smaller firms may lack the resources to adopt sophisticated data strategies and be more limited in the range of MI they can access. This will include monitoring of vulnerable customers, as in some instances firms may only encounter a single customer with a specific need. All firms, however, should be able to use data to come to a reasonable conclusion on whether their customers are receiving good outcomes.

Both general customer feedback and complaints data should be available for analysis to most firms, particularly when coupled with effective root cause analysis.

Data drawn from external sources such as the Financial Ombudsman can be used in firm board reports to consider qualitative issues and case studies on individuals or small groups of customers.

Good practice: Analysis of different customer types, including those with characteristics of vulnerability

Smaller firms often have closer relationships with their customers. This allows for more informal and bespoke solutions for consumers with characteristics of vulnerability such as home visits or video calls. Smaller firms also tended to be more flexible and able to respond more quickly than larger firms.

Good practice: Consumer Understanding

Smaller firms often have more flexibility to address acute problems. One firm produced an additional explanatory document after identifying a pattern of customers misunderstanding part of a product. The change led to improvement captured in informal feedback from both customers and advisers.

Areas for improvement: Analysis of different customer types, including those with characteristics of vulnerability

The FCA expect all firms to be able to identify actions to ensure they meet obligations under the Consumer Duty and evidence their effectiveness.  The FCA understand that smaller firms will have taken fewer actions over the course of the year and MI used to measure effectiveness may be limited.

Where issues have been identified, external experts, where available at proportionate cost, can be helpful in advising on effective action. The FCA have also seen examples of support from trade bodies and other umbrella organisations. In some cases, lenders or primary brokers provided guidance and information to other firms in the supply chain to improve the customer journey. The flexibility of smaller firms may even allow them to offer more tailored support to individual customers to ensure they receive good outcomes.

Future business strategy. Good practice: a focus on culture throughout the firm

Where staff have more than one role, firms should consider what training is needed to reflect this, and keep clear training records, which can be used to identify skill gaps.

Scenario-based training may also be helpful, using examples from real customer interactions. Regular informal check-ins and peer discussions can help reinforce understanding of the Duty and highlight practical issues.

Some smaller firms invested significant time and resource into improving staff understanding of the Consumer Duty.

In some cases, firms included customer outcomes in staff objectives and coupled them with other initiatives to help embed the Duty. Regular reviews and a stronger focus on outcomes helped these firms meet both internal and external Consumer Duty milestones.

Governance and analysis of different customer types

Smaller firms often made smaller or incremental changes demonstrating continuous improvement and culture shift. The FCA have seen firms put straightforward but often effective governance arrangements in place, such as monthly or quarterly reviews.

Areas for improvement: A focus on culture throughout the firm

The FCA wouldn’t expect the smallest firms to replicate extensive governance structures, but a positive culture that aligns with the Duty should be evident in firms of all sizes. As smaller firms may encounter fewer customers with specific needs, extensive policies and structures dedicated to these customer segments is unnecessary, but learning and recording the lessons learned during these transactions will help the firm ensure it delivers good outcomes.

Key points:

• These additional good practice and areas for improvement add to our understanding of what the FCA considers appropriate actions and where they might be concerned enough about issues to take action or follow up with firms.

• These examples make very clear that the FCA are reasonable around proportionality, and don’t expect smaller firms to have to use extra resource that would result in high additional costs.

• Opting to incorporate one or two of the good practice examples, where appropriate, would help smaller firms to be able to evidence to the FCA that they are both taking the Duty seriously and are keeping up to date with publications and updating practices where appropriate.

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