I’m writing this article a week before the deadline for the second annual Consumer Duty Board Report (CDBR#2). Working with friends at Ocorian, our in-house regulatory expert, Chris Adlard, and several other knowledgeable people, the subject of the second Board Report inevitably came up. These, however, are my words and should not be attributed to any other party.
My personal conclusion from these various conversations and interactions is that the first Board Report (CDBR#1) was a learning exercise for all concerned. The FCA gave firms a great deal of latitude and helpfully published a ‘good practice and areas for improvement‘ response, which will undoubtedly be used this time to hold firms to account. The four elements of criticism that resonated with me were data quality and provision, relationship to the four outcomes, inclusivity, and culture.
But let me first make a rather obvious, but I believe largely overlooked, statement of fact.
“There is no way your customers are going to get consistently good outcomes if your employees are not optimally competent in-role. And we know from millions of interactions that employee incompetence is the norm.1 Case in point, very few firms have a credible measure of employee competence, and if they can’t measure it, they can’t manage it.”
I believe the FCA was critical of firms that simply chose to repackage existing data sources and made no attempt to get new data. I particularly like the FCA’s comments about several firms that claimed to provide great outcomes but offered no data to back these statements up! I must believe the FCA, which styles itself as a “data-driven regulator,” will be less forgiving of this approach in CDBR#2.
This data is largely useless for improving a firm’s culture, driving good outcomes for all customers, evidencing it, or including anything credible in CDBR#2.
If one considers the data that most firms would have available on employee T&C (Training & Competence), it is of very little value in relation to CDBR#2. For too long, too many firms in the sector have pursued what the regulator calls a “tick-box” approach to T&C. Yes, more firms are seeing the light, particularly those that trade heavily on quality and brand reputation (but certainly not all of them), but thousands of firms still tick boxes and submit a “sea of green.” This data is largely useless for improving a firm’s culture, driving good outcomes for all customers, evidencing it, or including anything credible in CDBR#2.
The FCA is undeniably upping their game in relation to these inappropriate but near-default market practices. Firms can learn a great deal from successful FCA enforcements in financial crime that have cited inappropriate T&C practices. For example, in 2021, 45% of final notices identified deficiencies in training programmes, highlighting a reliance on inadequate or “one-size-fits-all” approaches and a culture of poor mandatory training completion. In 2022, three out of four fines cited deficiencies in training arrangements, including a failure to provide risk-sensitive or appropriately targeted training. In 2023, inadequate training for staff was a central theme, with the FCA voicing concerns that staff with due diligence responsibilities had insufficient knowledge to carry out their roles effectively. I have to believe that the regulator will continue their war on inappropriate training practices in CDBR#2.
Smarter firms are using continual assessment methodology (from Clever Nelly) that enables them to gently and collaboratively monitor and optimise the in-role competence of every employee, using less than one minute per day. The data harvested from this method not only provides real-time lead indicators of where consumers may not be getting great outcomes but also provides a new, independent source of data for CDBR#2.
What perhaps surprised me was that, after what is in reality a couple of years of this legislation, a significant number of firms failed to reference the four outcomes. What we used to call a “schoolboy error.” The regulator will certainly want to see CDBR#2 reference the four outcomes. Failure to do so almost flags a complete lack of understanding of the legislation.
One point that did not surprise me was the point I have called inclusivity. Having appeared on at least 10 Consumer Duty webinars with literally thousands of Governance, Risk, and Compliance professionals in attendance, what was abundantly clear was that a lot of firms “subbed” the writing of CDBR#1 to a single person in the compliance function. Many admitted to me that is what happened in their firm, and CDBR#1 was a piece of work that needed doing and filing. What I think these firms overlooked was that this approach was inevitably going to be pretty obvious to the regulator.
The board should be monitoring the business in relation to Consumer Duty all year round and, as such, challenging outcomes and activities on an ongoing basis. These challenges should be recorded in minutes and used as evidence of an appropriate culture. This is in contrast to a red flag that Consumer Duty is something the firm has “stuck on” to existing practices and is doing the absolute bare minimum, where there is no record of board challenge or indeed involvement in the production of CDBR#1.
I think the removal of the requirement for firms to have a Consumer Duty Board Champion is in response to this behaviour. After all, the Board Champion almost encouraged firms to pass the responsibility for CDBR#1 to the most logical person!
Finally, culture. The whole point of Consumer Duty is to ensure the public can trust financial services firms to put their needs and outcomes before excessive or unfair profiting. The FCA concludes that firms need to change their culture from being overly profit-centric to more consumer-centric.
Given my blindingly obvious statement at the beginning of this article, any firm that is unable to meaningfully assess and evidence the in-role competence of their workforce can hardly claim to have a consumer-centric culture. Well, let me restate that. They can claim it, but they won’t be able to evidence it!
I believe that as the FCA becomes an increasingly data-savvy regulator, they won’t need to look too hard for obvious red flags of slow-to-change or downright inappropriate culture. In the recent FCA Financial Crime Thematic Review, the regulator mentions “training” 92 times. If that isn’t a clear indication of the importance they are placing on firms ensuring employees are fully competent to facilitate consumers getting good outcomes, particularly in the two outcomes employees influence most (Customer Support and Consumer Understanding), then I don’t know what is!
If I worked in an FCA-regulated firm and was charged with drafting CDBR#2, I would certainly be reviewing my work in the context of employee in-role competence and the data I would use to support any claims that the workforce was optimally competent. I would not want to submit CDBR#2 claiming (completely unfeasibly and unbelievably) that all the employees were super-competent and have no credible data to back this up.
FYI, the FCA has been most helpful in providing guidance to Elephants Don’t Forget to enable us to build a Consumer Duty Culture assessment and benchmarking tool. If you would like to know more about this ahead of the formal launch, drop me a line.
- More than 200,000,000 interventions we have conducted over 13 years tells us the average level of employee in-role competence is just 54%.
