Consumer Duty Board Report

November 2023

Firms are at different stages of Consumer Duty implementation. Many are still finalising their drive to achieve full compliance on their open products. Others are addressing the specific and unique challenges with the impending closed product deadline whilst simultaneously seeking to fully embed the Duty. Whilst these respective challenges are explored further here and here — there is another impeding deadline that is (rightfully) gaining more and more focus — the annual assessment report that must be reviewed and approved by the firm's governing body. As directly referenced in a FCA speech on 1 November, “this will take time to do well, so don't delay!”

Therefore, to help expedite, KPMG in the UK has produced this article to explore how best to approach, design, build and execute the annual assessment report to maximise its usefulness and, critically, align to FCA's expectations.

Developing an effective framework to deliver the report should specifically consider: 

• Accountability: The ownership and associated accountability for the generation of the report must be explicitly clear. It should be owned by first line, for example by operations or product team(s). There is a real risk that if the responsibility is allocated to second line, or the board champion themselves, it will be disconnected business, and consequently may not fully align with FCA expectations. However, regardless of where the accountability is allocated within the first line, the report will need to factor in all aspects of first line activity — as well as contributions from the second and third lines of defence. 
• Cultural mindset: The firm will need to ensure that it approaches the annual report with a developmental mindset — seeking to objectively check and challenge the report. Non-execs should reinforce this challenge. The firm (and board) should expect to identify issues and areas for further enhancement. A report presenting a sea of green metrics or one that adopts a tick-box and/or simplistic attestation approach is unrealistic and can indicate a poor cultural approach to the Duty. Instead, KPMG in the UK anticipate that many firms will conclude that, although their strategy and business models are aligned to the duty, at individual product or operational level there are gaps that are being proactively addressed. Indeed, as stated by the FCA in the above speech, "the Duty is not once and done. Firms’ actions, assessments, testing and evidence need to be continuous."
• Stakeholder Engagement: Whilst we expect that much of the report's content will be driven from the bottom up (in terms of summarising the evidence supporting good customer outcomes), there is also merit in ensuring that it has the right top-down approach too. As such, early engagement with the board, especially the board champion and NEDs, on specific areas of focus and/or concern will be critical. As such, there is an element of starting with the end in mind, when determining how best to approach and structure the annual report. In some instances, firms have already had an early dry run of the report designed to test whether it meets the board's needs. This approach helps to maximise the efficiency and effectiveness of the firm's approach to the report. 
• Proportionality: Although the FCA has provided guidance on the annual report contents, there is not one set template. There is a not a `one size fits all' solution. Each firm will need to approach the report differently depending on the size, complexity and nature of the business. For example, the monitoring obligation will apply proportionately to a firm's role in the distribution chain. Further, it is very likely that the firm's existing approach to conduct reporting will fundamentally shape the report. 
• Timing: The report needs to be reviewed and approved by end of July 2024. However, this is not an explicit or exact date — firms can choose an earlier date that suits. Some firms are aligning the report to their year-end, other formal reporting mechanisms, or even to their board strategy away day(s), where the report (and next steps) can be explored in more depth. 
• Data capture: To support the presentation of relevant metrics, firms should begin considering how the relevant inputs will be gathered and collated in practice, and the accountability for this (see above), to ensure data gathering and analysis can be performed accurately and efficiently.

• Metrics: The report will need to include appropriate quantitative metrics that drive the summary ratings and conclusions on monitoring outcomes. The report should be designed to enable effective decisions, supported by accurate, timely, relevant and consistent data with supporting commentary. As flagged above, where there are identified gaps, this should be highlighted. This will enable effective challenge by the board. 
• Qualitative commentary: Whilst firms may not yet have a full suite of MI to evidence all outcomes, the report should be designed to include an appropriate array of examples, anecdotes and case studies to support the above metrics and provide a qualitative commentary on the nature and scale of some of the changes that have been made by the firm to comply with the Duty. This is critical to the overall narrative of the report and will help move the mindset out of the theory and any tick box mindset into the practical, and facilitate a broader, holistic discussion. 
• Report scope: The report should cover all aspects of the Duty, designed to ensure that, alongside the four outcomes, there is appropriate consideration of the overarching Principle, the cross-cutting obligations and embedding of vulnerable customer considerations. Only by having this more holistic consideration, will the report meet regulatory expectations — including delivering on the FCA's four outcomes and covering off the prescribed requirements:
  • Whether retail customers are being, or have been, sold products that have been designed to meet their needs, characteristics and objectives; 
  • Whether the products that retail customers purchase provide fair value and appropriate action has been taken to address products identified as not providing fair value; 
  • Whether retail customers are equipped with the right information to make effective, timely and properly informed decisions; and 
  • Whether retail customers receive the support they need.
• Layering: The clear structure and presentation of data and information will be critical to ensure that the discussion is taking place at the right level. As such, the report will require hierarchy so that the high-level statements and assurances can be substantiated via the underlying reported metrics and case studies. However, this requires careful balancing. Too much information will be difficult to navigate and blur the overarching position, whilst having too little will challenge the robustness of the report.
• Escalation: Aligned to the layering point above, firms will need to ensure that the report includes detailed information on areas that merit escalation and remediation. Aligned to the `warts and all' mindset captured in the above section, the report will need to clearly escalate matters that warrant either further investigation or remediation. For example, the report should be definitively written for the board, but firms should be mindful that the FCA is going to want to see it. Firms will need to be comfortable that it addresses, in sufficient depth, existing, inherent, relevant FCA portfolio letter risks as well as firm specific risks and issues.
• Builds on previous reports: A good report should be built upon the solid foundations of the implementation activity the firm has already delivered. As such, firms should design the report from a `no surprises' principle, leveraging and further developing the MI and reports that the board has been receiving to date. Many firms have been updating boards on a monthly or quarterly basis and therefore, in aggregate, this will amount to significant volume of information already. Further, the annual report will need to build upon (and make material reference to) the firm's 'Day 2' plans in relation to further embedding and evidencing against the Duty, alongside other key priorities of the firm.

• Assessment Summary: This section includes an executive summary, detail on the approach taken to (and results of) monitoring customer outcomes and a summary dashboard. It should also cover key actions required to address any evidential gaps or identified instances of poor outcomes, and any required amendments to the firm's strategy. This section of the report should also definitively conclude on 
  • The overall outcomes being received by retail customers; 
  • Whether the firm is complying with its obligations under the Duty; and 
  • Whether the firm's future business strategy is consistent with its obligations under Principle 12 and PRIN 2A. 
• Business Strategy: This section should consider all activities of the firm alongside the future business strategy, associated risks, and details of any agreed changes to the strategy to remain consistent with the Duty. 
• Alignment to Culture and Purpose: Firms should evidence the alignment of their culture and purpose to the specific obligations under the Duty and capture areas of further development to ensure alignment and/or maximise its embedding. For example, firms should capture changes to pay, rewards and incentives schemes and specific Consumer Duty training. For a more detailed explanation of FCA expectations, you can read KPMG in the UK's culture and purpose article here. 
• Consideration of Cross-Cutting Rules: This section provides an overview of compliance with each of the cross-cutting rules, by referring to both the relevant metrics and case studies captured with the report. This should also include consideration of how the external environment is changing and how the firm is responding to associated foreseeable harm. 
• Good Customer Outcomes: This is the main section of the assessment, containing a dedicated sub-section for each in-scope product or service, with outcome RAG ratings supported by relevant graphs/MI and supporting qualitative commentary. We anticipate that each product would have also dedicated sub-sections covering each of the four outcomes' rules for Products and Services, Price and Fair Value, Consumer Understanding and Consumer Support. This section should draw on any customer journey mapping exercises already completed by firms. However, it should also assess the appropriateness of the capacity, quality and methodology of firm's outcomes testing approach. 
• Approach to Vulnerable Customers: The FCA's expectation is that consideration of vulnerable customers is embedded within the firm and therefore aspects of it are likely to appear throughout the report. However, this section is designed to aggregate and form a holistic view about the approach that the firm has adopted and embedded its consideration — and the impact it has had on customers. 
• Rectifications/remediation: As captured elsewhere within this article, firms should expect to find issues following the implementation of the Duty — firms are holding themselves to a higher standard and proactively looking in more detail for issues. This part of the report should capture those key risks and issues that a firm is currently experiencing, coupled with the proposed action(s) to address them. This should include the action logs allowing for a RAG rating to be applied to each entry and prompt consideration of root cause, accountability/ownership, as well as the effectiveness of actions undertaken or planned. 
• Oversight and assurance: This section provides space for the impact of (and on) second- and third-line oversight. As such, it will cover how Risk and Compliance and Internal Audit have developed their approaches to monitoring and review activity to align it to the requirements under the Duty. However, it should also capture an overview of reviews undertaken in relation to the Duty, key risks or issues identified and lessons learned and critically, how they help support the conclusions reached within the report. More generally, input from both Risk and Compliance should be sought on other aspects of the report too. 
• FCA engagement: The level and nature of FCA interactions relating to the Duty are helpful to draw comfort about how aligned the firm is to FCA's expectations. This can include individual interactions as well as the impact on the firm of the FCA's portfolio letters and other key FCA communications.
• Board Approval: A final section to allow the assessment to be approved on behalf of the board, along with a confirmation the key elements the Board is required to agree and/or approve — including, but not limited to, the stipulated requirements.

• Role of Board Champion: The role of the Board Champion will be critical in this first annual assessment report. Early and ongoing engagement with the Board Champion is recommended to maximise the alignment of the report with the key concerns and issues from a board perspective. For example, boards are agreeing the report framework to ensure it is fit for purpose before it is populated with MI, case studies and commentary. However, when the report is presented, although the Board Champion will have been heavily involved, it is imperative that a well-rounded and holistic discussion takes place and that all board members are involved and engaged in the debate.
• Robust and objective assessment of the report: The report needs to be subject to robust and objective assessment. Sufficient time will need to be dedicated to allow board members to review the report in advance to ensure a detailed discussion can take place. Firms should anticipate a level of check and challenge, and may want to consider factoring in more than one board session to finalise the report. 
• Assess alignment to the firm's risk appetite: Whilst there will be a natural tendency to review the report in isolation, the firm's broader risk appetite will need to be overlaid into the discussion to ensure that the firm is not accepting too much (or indeed too little) risk in evidencing good customer outcomes. 
• Capture detailed meeting minutes and agreed actions: To illustrate the depth and robustness of the associated discussion of the report, firms will need to capture detailed minutes and agreed actions. The FCA has already flagged that it will want to see some of these reports (and the supporting MI) and the minutes provide valuable additional insight into how the final agreed position was reached. Minutes that simply note the annual assessment report was discussed and approved will not be sufficient. 
• Highlight future enhancements to process and reporting: With many things associated with the Duty, there is the opportunity to make iterative enhancements and the annual report is not different. There is value in undertaking lessons learned activity to capture what can be improved for the next one — both in terms of the process and the report itself. Over time, aspects of report production should be able to be automated (e.g. MI), to allow for greater time and focus to be spent on the “what”, rather than the “how”. This is indicative of the wider approach that firms need to be adopt to the Duty itself — one of a continuous improvement cycle. 
• Agree future board reporting (content and cadence): Whilst the formal report is required annually, conversations on customer outcomes are expected to take place throughout the year. This deep dive, however, will provide an excellent opportunity to define what additional MI and evidence the board should be considering on a more regular basis.  

KPMG in the UK have specialists with experience supporting firms with formal transformation, building board reporting, assurance reviews, closed book implementation, associated technology and tooling for embedding the duty and strategies the commercial opportunities that the Duty offers. If you would like to hear from one of them or require specific support on your Consumer Duty programme and/or BAU activities, please do not hesitate to get in touch. All KPMG's other articles on Consumer Duty are accessible on our Consumer Duty hub.