Embedding the Consumer Duty into your culture | Deloitte UK has been saved
Board members, senior executives, Consumer Duty champions, and those in in-house legal teams, remuneration policy committees, learning and development functions, and other teams involved in the implementation and ongoing monitoring of the Duty.
Over the past year, firms have been delivering their Duty plans, in anticipation of the 31 July 2023 implementation date. The focus for many firms has been on meeting the requirements across the four outcomes of the Duty. But their attention now needs to turn to how they will demonstrate that the firm’s culture aligns with the Duty. Embedding the Duty into a firm’s culture is essential to successful, enduring compliance and the FCA will be expecting to see what actions firms have taken to ensure their culture reflects the Duty.
This article highlights steps that firms may wish to consider to embed the Duty successfully within their culture.
A robust, customer-centric culture is critical to the successful implementation of the Duty and delivery of good customer outcomes. The FCA’s recent speech in June 2023 highlighted that culture remains central to its supervisory model as it underpins outcomes. A culture aligned to the Duty can provide firms more flexibility to adapt better to new scenarios and the challenges arising from changing customer needs and market, product and distribution landscapes.
In addition, the FCA’s review of firms’ Consumer Duty implementation plans highlighted some concerns around the embedding of the Duty within firms’ culture, specifically that some firms had limited analysis or lack of planned actions.
In our analysis, we use Deloitte’s Culture Assessment Framework and its 16 cultural indicators across four key areas to identify some key actions that firms might want to consider to embed the Duty into their culture.
When purpose is aligned to the organisation’s values and those values balance the need for profit with the need to deliver good customer outcomes, having a purpose-led culture can support meeting the Duty outcomes. In addition, a strategy focused on delivering good customer outcomes with key performance indicators to support it will enable firms to demonstrate their purpose, values and strategy are aligned to the Duty outcomes.
Effective governance is essential for upholding the Duty within a firm. Governance frameworks that embed the Duty are likely to establish clear accountability, transparency, and effective oversight of customer outcomes. Duty considerations should be cascaded to all relevant established committees in the firm. These committees can act as catalysts for a strong customer-centric culture, creating a platform for transparent conversations, monitoring and assessment of outcomes, and ensuring that the customer perspective is consistently considered.
Practically firms can look to:
Senior leaders play a crucial role in embedding the Duty within the firm’s culture by creating the “tone from the top”, as highlighted by Sarah Pritchard, Executive Director of Markets at the FCA. It is essential that this tone is echoed by middle management with practical actions. Employees at all levels should understand their role in delivering good customer outcomes. This is particularly important as the Duty introduces a sixth Conduct rule, which requires all Conduct Rules staff1 to “act to deliver good outcomes for retail customers”. It emphasises the accountability of all individuals within the firm, regardless of seniority, for their actions and the impact on customers.
Given the focus on accountability, the SMCR is a core element of the firm’s culture. SMCR establishes clear lines of responsibility and firms should consider reviewing their SMCR framework such as statements of responsibilities to ensure alignment with the Duty requirements.
It is also vital that firms create a culture which empowers employees at all levels to speak up and provide challenge, without fear of retaliation. A psychologically safe environment boosts morale, fosters improvements, and ensures that “bad news travels fast” for it to be addressed quickly.2 While harsh penalties for consumer harm might deter harmful actions, they could also inadvertently lead to employees fearing to admit mistakes or attempting to conceal them. This fear of punishment can result in poor customer outcomes, particularly for frontline agents who have significant interaction and influence over customers.
Practically firms can look to:
A firm’s culture is shaped by its individuals, their knowledge, and skills. As a starting point, a firm’s recruitment process needs to reflect its customer-centric culture. Job advertisements, role descriptions, and interview questions should directly relate to the firm’s values and culture to assess the candidate’s alignment to them. Firms should also promote diversity and inclusion to stimulate challenge and varied thinking and cater to a diverse customer base.
Given the extent of change involved as part of the Duty, and the impact this will have across different roles, role-specific training will be required. Firms should also consider ways in which this will be measured and evidenced on an ongoing basis, for example metrics on training completion data as well as engagement with the Duty and culture-related communications.
Firms should also encourage knowledge sharing to facilitate the dissemination of valuable insights and leading practices. It enables employees to learn from each other and can help improve outcomes.
Practically firms should look to:
The spirit of the Duty should be reflected in the way that a firm remunerates and incentivises its employees. In its August 2022 Dear Chair of remuneration committee letter, the FCA made clear the importance of remuneration policies that support the expectations of the Duty. More recently, Sheldon Mills, Executive Director of Consumers and Competition at the FCA stressed in a speech that firms should challenge themselves on whether their remuneration and incentives policies are driving good customer outcomes.
Firms should consider how they use Consumer Duty MI for incentive design and performance management purposes to ensure that customer outcomes are considered for incentives at all levels. This MI could also be used to identify areas of potential foreseeable harm linked to remuneration and incentives, including reviewing MI for unusual data patterns which indicate deteriorating outcomes. For example, whether in the run-up to the performance cut-off date there is evidence of sales spikes or unusual patterns from particular sales staff. These spikes could indicate staff are trying to meet incentive targets which in some circumstances could lead to poor customer outcomes.
In addition, firms will need to make sure that remuneration and incentives structures do not discourage staff from identifying and escalating concerns about customer outcomes. Firms need to strike a balance where remuneration and incentives reward behaviours that lead to better outcomes and also those that result in the timely identification of a deterioration in outcomes.
Practically firms can look to:
A customer-centric culture into which the Duty has been successfully embedded is likely to result in better customer and commercial outcomes in the medium term. Achieving this will require firms to act - only through deliberate efforts can a firm successfully develop a culture that embodies the spirit of the Duty. These actions will include aligning remuneration and incentives with customer-centric behaviours, ensuring there is effective governance and oversight to monitor the delivery of good customer outcomes and fostering an environment where employees are encouraged to speak up to share concerns or ideas and feel it is safe to do so.
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1 From the Final Policy Statement (PS22/9, Guidance 4.1.28): Rule 6 applies to all conduct rules staff, regardless of whether the person is in direct contact or dealings with retail customers. Conduct rules staff means all staff in scope of COCON and includes the majority of staff of an SMCR firm, the exceptions can be found in COCON 1.1.2
2 Amy Edmondson, The Fearless Organization: Creating Psychological Safety in the workplace for learning, innovation and Growth (2018)
3 Final Guidance 21/5: 3.8 (FG21/5), where there are five criteria that the FCA expects firms to consider for ex-post risk adjustments to variable remuneration.
Kareline is a director in Deloitte’s EMEA Centre for Regulatory Strategy, specialising in insurance regulation. Kareline has more than 15 years of experience in both prudential and conduct insurance regulation, providing high quality advice to firms in the UK market. At Deloitte, Kareline leads a team of experts to carry out horizon scanning and assess the strategic impact of regulation on the market. Kareline provides advice to insurance clients on the impact of regulation on their business, finance, and operating models. Kareline has led engagements supporting clients with a number of regulatory challenges including Brexit and restructuring projects, advice on impact of Solvency II/ Solvency UK over capital decisions and investments, supporting a top 3 retail general insurer on interpretation and compliance with Pricing Practices rules, and design and implementation of insurance products and customer journeys for a large life insurer. Kareline is a member of the ICAEW Risk and Regulation Committee and the Solvency II working party. Kareline has authored several publications and columns on insurance regulation and Solvency II over the past ten years.
David is Head of Deloitte’s EMEA Centre for Regulatory Strategy. He focuses on the impact of regulatory changes - both individual and in aggregate - on the strategies and business/operating models of financial services firms. David joined Deloitte after 12 years at the UK’s Financial Services Authority. His last role was as Director of Financial Stability, working with UK and international counterparts to deal with the immediate impact of the Great Financial Crisis and the regulatory reform programme that followed it.
Richard is a Director in Deloitte Legal UK’s Financial Regulation practice and is an expert in conduct risk. Prior to joining Deloitte, Richard spent 7 years at the Financial Conduct Authority (FCA) undertaking roles within the Legal Group, Enforcement and Risk & Compliance Oversight. Richard leads Deloitte Legal’s Consumer Duty and Buy-Now-Pay-Later offerings.
David has 25 years’ experience in the financial services industry and has significant experience across Retail Banking, Wealth Management and Insurance markets. David leads our National Retail Conduct and Governance team. David specialises in advising on compliance and conduct risk issues, ranging from SMCR, the design and development of conduct risk strategy and frameworks, leading our conduct assurance activity, including skilled person review and leading many of our large scale complex regulatory transformation projects.
John is the Lead Partner in our Financial Services Reward practice. John has over 20 years of reward consulting experience and has a broad portfolio of Financial Services clients in the UK and globally, including Banking, Insurance and Asset Management firms. He has wide experience in advising Financial Services companies in the structuring and implementation of remuneration strategies and incentive arrangements, including advice on reward strategy, incentive design, performance metrics, corporate governance and investor consultation, as well as regulatory projects in this area.
Jess is a Director in the Risk Advisory Practice, within the non-financial risk team. Jess co-leads the Risk Culture proposition for FS, supporting clients with their risk culture assessments, reviews and transformations. Jess brings strong knowledge of international regulatory expectation to the practice.
Junn is a Consultant in the EMEA Centre for Regulatory Strategy, focusing on retail conduct, consumer credit and sustainability regulations. Before joining Deloitte, Junn interned at UBS. Junn holds a Msc in Political Economy of Late Development with LSE.