FCA Consumer Duty: Key details from the December update

In December 2024 the FCA released two new updates after reviews into retail financial firms’ approaches to the Consumer Duty implementation. The updates cover approaches to completing the first annual Consumer Duty Board report, and firms’ approaches to complaints and root cause analysis.

We’ve collated the pertinent information in one place for you and our insight on what you can do to ensure you’re aligned with FCA best practice.

One challenge with the Consumer Duty is the occasionally vague guidelines produced by the FCA. This is a brand new initiative and sometimes it feels even the FCA isn’t exactly sure what they expect the research and subsequent reports to look like. Luckily, these reviews allow the FCA to provide more concreate guidance to Consumer Duty outputs. To provide guidance this update the FCA reviewed a sample of 180 board reports, and complaint and root cause analysis from 40 firms.

This recent update has allowed the FCA to state what they expect from a “good” report. The five aspects of good reports they’ve highlighted are:

• Clear outcome focus – Dedicated sections focused on each of the four outcomes, detailing what good outcomes looked like for customers holding their products.
• Good quality data – Commentary on good outcomes supported by good quality management information that backed up the firm’s conclusions.
• Analysis of different customer types – Consideration of different groups of customers, including those with characteristics of vulnerability.
• Clear processes for production of the report – Processes in place for producing reports for firms’ governing bodies to review and approve within the necessary timeframe.
• A focus on culture throughout the firm – Commentary emphasising firms’ commitment to effectively implementing the Duty and the role of a positive culture in delivering good outcomes.  

In the analysis of complaint and root cause analysis the FCA stated most firms that had established good processes for carrying out this analysis could evidence “clear escalation routes and accountability, meaning everyone across the business knew where to send MI and other information.” The FCA particularly highlighted solutions such as dashboards to help track outcomes and identify harm. They also suggested that good practice might involve looking outside of a company to analyse complaints, pointing out one firm that explored Financial Ombudsman complaints that weren’t upheld so it could understand what drove complaints even when the outcome to the complaint was judged to be fair

In both cases the review has has allowed the FCA to zero in on some areas of improvement. The organisation doesn’t state how may firms reports may not be currently up-to-scratch, but it’s certainly enough to warrant highlighting some potential pitfalls. The FCA seems to be suggesting that this is your chance to fix any of these issues if your report is not up to scratch.

1. Better data quality - Some firms did not have sufficient data quality to justify conclusions or prove they are meeting their obligations under the Duty. Some did not explain clearly why this data demonstrates good outcomes. 
2. Comprehensive view across distribution chains - Manufacturer-distributor relationships have been an ambiguous area for Consumer Duty. Some reports did not contain evidence that an appropriate amount and types of information have been shared between the firm and third parties across the distribution chain.
3. Analysis of different customer types - Some firms did not evidence that adequate consideration had been given to outcomes for different groups of customers, including those with characteristics of vulnerability – a huge focus for the FCA.
4. Challenge from the board - It was not always evident that there had been effective challenge from firms’ governing bodies on the content of the reports.
5. Taking effective action - When firms did lay out action plans and improvements, these are less credible if they omit timescales, action owners, and clarity on the data that will be used to evidence good outcomes.
6. Assessing and measuring the impact of these actions - Firms did not always measure the impact of interventions they had made to ensure these were the right changes to make.  This means that sometimes firms pursued actions even though they were not as effective as they might need to be.

While item four has now been put in doubt by the Treasury’s recent announcement that the role of a board-level Consumer Duty champion might no longer be required, the others are still very much active.

Addressing areas of improvement

Knowing what a problem is not the same as solving it. Having fully reviewed both updates, we can make some recommendations for convincingly addressing some of these potential issues:

1. Establish definitions for objective outcome measurement, rather than relying on subjective judgement. These could include quantitative comprehension tests (for the Understanding outcome), a competitor survey (for the Price & Value outcome), structured consumer interviews on customer journey (for the Products & Services outcome) and complaints metrics and feedback surveys (for the Support outcome). Internal audits are unlikely to be enough.
2. Interviews with distributors, and joint research with third parties’ customers. The FCA makes both parties responsible for any product not distributed by its manufacturer. This means it isn’t enough to simply say that the other party will take care of, for example, customer support. One way to address this is to agree a joint strategy where each of you is responsible for specific things, and you share relevant data to help each other do better. Data protection rules matter, but most firms should be able to do this without breaching them.
3. Look for industry best practice in customer classification: the definitions of vulnerable customers are given by the FCA, but you might find common ground in segmenting your customers so that data can be meaningfully compared and aggregated across your sector.
4. Board challenge may or may not still be important – but it can’t do any harm. Your board might consider appointing independent advisers who have not been involved in the testing and compliance process to help them formulate questions to ask.
5. This one is perhaps the simplest: just follow every improvement action with a date, an owner and an objective, data-based test that can be passed or failed, to determine whether the action has been successfully implemented. For example, “Customer complaints received in our post-engagement survey will reduce by 40%.”

Across each area, an approach based on consumer research, reflecting the latest behavioural science evidence on how to collect objective metrics, should answer the FCA’s concerns. A number of firms are still relying on internal audits rather than consumer testing, and while this may be seen as acceptable by the smallest firms, those with enough customers – and resources – to do external testing will be expected to do so.

Broadly, that approach can be structured around the four consumer outcomes:

• Products and services: interviewing customers using a structured method to elicit and check genuine needs. This does not need to be done on a quantitative scale but should include enough customers (typically 10-40 interviews) to give confidence in the results.
• Price and value: market review plus value benchmarks using a tradeoff exercise with a representative sample of the target market.
• Comprehension: a quantitative comprehension test, possibly supported by cognitive interviewing to understand the reasons for any hard-to-understand sections of your documents. Behavioural design input when restructuring documents.
• Support: actively talking to customers during and after each stage of the product lifecycle: through an on-demand customer response survey, recruited qualitative interviews, or both.

These research activities can be tailored to your budget, timescale, the complexity of your offering and the risks faced by your customers. But without them, you and the FCA will be left guessing whether the outcomes are being achieved.