What does this mean in practice? The answer depends very much on the intended changes to the scope of the SMCR, and in particular to the COCON Rules that underpin the regime. With Board approval required for implementation plans by the end of October 2022, firms and their senior managers (SMs) need, at the very least, to get and look busy.
As ever, there is a lot of detail in both the Handbook and the new Non-Handbook Guidance - and all of it matters. It is also true that the application of FCA Rules and Guidance will always be very context specific. Nevertheless, there are some high level points of general application for SMs to bear in mind across all areas of financial services activity.
For a start, SMs need to be (and seen to be) adopting a pro-active approach. The Duty is essentially designed to be pro-active in nature, and this approach is underlined by new Guidance in COCON 4.1. For example:
- COCON 4.1.29 …Rule 6 [i.e. all conduct rules staff must act to deliver good outcomes for retail customers] must be interpreted in accordance with the standard that could reasonably be expected of a prudent member of a Firm’s conduct rules staff. Factors relevant to this standard … include:
- their seniority;
- the scope of their job and in particular the degree to which the responsibilities of the job are able to affect the outcomes experienced by retail customers;
- COCON 4.1.30 Someone in a management position is likely to have a greater ability to influence the outcomes experienced by retail customers than someone who is not…[and]… has a wide duty to understand, manage, control and oversee the business for which they are responsible.
- COCON 4.1.32 Seniority may be relevant to the extent to which it is reasonable for a member of a Firm’s conduct rules staff to be expected to:
- analyse how their area of responsibilities fits into the overall systems and processes of the Firm for ensuring good outcomes for retail customers;
- COCON 4.1.33 Seniority may also be relevant to the extent to which it is reasonable to expect a member of a Firm’s conduct rules staff to be concerned with policies and procedures about retail customers on a Firm-wide basis and not just for their area of direct responsibility. This is particularly the case for SMF managers who are members of their Firm’s governing body or other senior management forums and for other members of a Firm’s governing body.
In our view, this does not mean that each SM has to take personal responsibility for actively managing every aspect of the firm's Consumer Duty compliance. On the other hand, it is effectively an extension of the existing SM Conduct Rule in COCON 2.2.2 requiring them to ''… take reasonable steps to ensure that the business of the Firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.'' This extension suggests that SM will need to demonstrate a reasonable basis for believing that business areas for which they do not have direct responsibility for, but are aware of due to participation in management and governance fora, are being managed in a compliant manner.
An obvious way for SMs to maintain a general understanding of the levels of compliance in relation to Consumer Duty is through regular discussion of the subject at board/committee level. It is a requirement that the Board assess the position 'at least annually'. However, it is unlikely that checking a snapshot of CD compliance once a year will be sufficient to discharge the FCA's expectations for Board responsibility and even less likely to suffice for those individual SMs who run the business day to day. How will they demonstrate ongoing oversight of compliance with the Duty, from the perspectives of both the firm and themselves personally? In addition, how will a firm's Risk and/or Internal Audit functions comply with the Guidance direction to treat customer outcomes as 'a key lens' through which to monitor business activity?
One practical difficulty is that the existing governance structures of many firms, particularly those which are either dual regulated or enhanced scope, are designed around a number of interwoven business activities. Regulatory compliance may currently be important to all areas of the business, but all too often it is treated as subsidiary to commercial requirements, and only actively considered as part of initial development or when problems occur.
In the new Consumer Duty world, firms (and their SMs) will need to be able to demonstrate conscious and overt compliance at all times. We suggest that the starting point for this is to design a distinct governance structure to manage Consumer Duty compliance, and allocate specific additional Consumer Duty responsibilities to individual SMs. We would suggest that firms update SoRs as appropriate for clarity as part of the documented approach to Consumer Duty.
Provided that the existing governance structure aligns with current FCA requirements and expectations, this update should not, in practice, require major changes to be implemented. Once designed with the Duty's purposes in mind, it should then be overlaid and integrated into the firm's existing governance structure.
Taking this approach should enable those factors necessary to deliver Consumer Duty compliance to be discrete (and therefore by definition more visible and more easily articulated) while being embedded in the rest of the firm's governance structure. We believe that this is one of the most effective methods to allow individual SMs to have clarity about the firm's and their own personal compliance with the Duty. This will also provide the firm with the ability to clearly evidence its Consumer Duty compliance arrangements and the means to demonstrate ongoing compliance to the FCA.
This is not in itself a new concept. Many firms have dedicated compliance teams, or other structures intended to focus attention on one or more aspects of a range of compliance activities. We will always advocate that governance processes should be discrete but intertwined as much as possible. However, conceptually, the approach that we suggest is to isolate how governance works for specific or thematic compliance issues. The exact form of any such governance structure would inevitably vary greatly between firms, but would typically contain elements along the following lines:
- At Board level, the firm's Consumer Duty 'Champion', as well as the CEO and any Chair, will be responsible for providing constant challenge to the executive about the application of FCA requirements. The subject should be formally tabled for regular discussion (perhaps quarterly), and a 'Consumer Duty Agenda' developed to focus Board discussion on the FCA's Key Questions. This approach would help to keep the subject in focus throughout the year.
- One SMF would be primarily responsible for Consumer Duty oversight, including for leading these discussions, presenting updates and issues to the Board (including the annual report), and for co-ordinating the firm's monitoring and development activity.
- That activity would be organised and overseen by responsible SMs and/or Certified Persons, whose remit would be to ensure both the consistent interpretation and implementation of Consumer Duty policy and process across the various business areas. Integrated as an agenda item at the appropriate existing committee, implementation and embedding of the Consumer Duty will need to be supported by a steady flow of meaningful MI designed to evidence compliance and reassure the Board in the short and longer term.
This committee would report to the Board through its usual reporting activities, which enables the Board to have direct oversight of its activities in relation to Consumer Duty. In addition, each SM would, to the extent they were not directly involved in Consumer Duty compliance, have a reliable basis on which to be assured that the firm is demonstrably compliant with FCA requirements, and to be comfortable that their own individual COCON duties were satisfied.
The FCA has taken relatively few SMCR scalps because the regime is not that old, but the individual accountability that comes with the Consumer Duty will likely create plenty of opportunities for FCA Enforcement investigators to change that.
If you require any advice or support in the implementation of your plans with regards to the Consumer Duty please reach out to a member of our team.
Have you read our previous articles providing an overview of the required risk analysis and our recommendations of how to assess outcomes when implementing the Consumer Duty in your organisation? Visit the hub here.
