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Consumer Duty: How to measure cultural change
The Consumer Duty is intended to ensure firms step back and examine key aspects of their operation. From the more practical such as value, communications and business strategy, through to those less tangible, such as whether their culture supports good outcomes. This week our article is going to focus on the cultural change intended by the duty, specifically how to measure that change.
FCA’s position
A good starting point is to remind ourselves of the FCA’s position on culture. The FCA have, for a number of years, set out their view that there are four key drivers of culture in firms, these are – purpose, leadership, approach to rewarding and managing people, and governance.
The FCA also published a paper on the subject of transforming culture in March 2020 which emphasised the importance of adopting a healthy culture, suggesting that “putting a clear, meaningful, purpose, at the centre of a firm’s business model” is key. It also stressed that “when aligned to positive outcomes for shareholders, employees and customers, purpose can benefit firms and play a fundamental role in reducing potential harm to consumers and markets.”
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The Consumer Duty and Culture
The regulator’s focus on duty has only increased in recent years, a central pillar in their three-year strategy and, of course, the Consumer Duty. From the duty’s perspective the core requirement is eloquently put in FG22/5 where the FCA declare “Firms should ensure that the interests of their customers are central to their culture and purpose and embedded throughout the organisation,” this means that firms need to consider what’s right for customers at the very point of deciding or reviewing the firm’s business strategy.
Those who design the business and its activities only through the lens of profitability are unlikely to be compliant with the duty, for example, the firm may identify a gap in the market which they could create a product for. If marketed correctly this new product would make a good number of sales. If they decide to push ahead having only considered likely sales, they may not be compliant because there is a risk the product may not function well for customers (perhaps this is why there is a gap in the first place!) which could result in harm. Instead, a review of the product's impact on customers, essentially whether it can be beneficial for them, should be a key component of the decision.
This example covers the point in time a new product is conceived, the same must be done throughout the business cycle, from the concept of the business through to annual board reviews.
Board Report
As we highlighted in our previous articles on the subject “Writing your Consumer Duty Board Reports'' and “Consumer Duty Board Reports – Don’t leave it too late” perhaps the most important element of the Board Report is to review the alignment between the organisation’s culture and the duty. This is why we house this section at the beginning of our board report template which can be downloaded here.
A statement by the consumer duty champion, outlining their view of the outcomes that customers receive and the level to which the duty has been embedded within the firm is a great starting point. We include a short list of suggested topics the champion can write about.
The culture section should then get the Board to reflect on whether the duty has been defined properly, for example is there an understanding of how the duty works across multiple firms within the same group and/or a definition of ‘good outcomes’ which has been successfully cascaded throughout the company?
This section can then review the businesses values, goals and ultimately, whether the business plan is aligned with the duty – findings from the main body of the report will inform this decision.
Leadership, People and Governance are also important, they ensure the actions the leadership team have taken to promote and embed the duty are reviewed.
Measuring Cultural Change
It follows that the Board Report is the place where the firm’s culture is defined, with the report explaining to the Board exactly where the organisation is at that point in time, allowing them to drive actions.
The real skill is understanding which measures can be used to assess whether the organisation’s culture is right, or not. We’ve sought to include some examples to assist, framed around the four key drivers:
Leadership
Is there a clear message from the leaders in the firm, setting the expectations in respect of behaviours?
Do the actions of the leaders represent the behaviours they expect of others?
Do leaders make decisions with the intended culture in mind? For example, are there instances where they put customer well-being above profit?
Approach to rewarding and managing people
Are bonus payments / commissions balanced with quality measures?
Do quality measures focus on the actions taken to support customers, including ensuring product suitability
Are staff suitably trained in respect of the product and target market needs?
Are staff trained to identify and support vulnerable customers?
Do quality measures promote good customer outcomes (or can they drive agents to solutions which are not in the customer’s best interests?)
Governance
Are processes set up in a way which enables identification of customer harm?
Has as much focus been placed on processes which measure customer outcomes as those which measure profit?
Are senior managers made aware of the impact the organisation has on customers and do they pay attention to this information?
Is the appointed consumer duty champion making efforts to focus on culture?
Purpose
Placed last as this is where, using all of the earlier considerations, the Board needs to assess whether the firm’s core purpose is consistent with the needs of customers.
A key element of reviewing purpose is to consider how the firm’s purpose is making staff members behave.
By following these guidelines, your approach will not only meet regulatory expectations but will also drive meaningful discussions and decisions that enhance consumer outcomes and align with the overarching principles of the Consumer Duty.
Our full range of Consumer Duty compliance resources – including webinars and downloadable content such as our template Board Report – are available to browse and buy here.
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