In lieu of something more formal from the FCA, KPMG in the UK has developed a simple list of questions to assist firms in determining practically 'how far is far enough' in terms of meeting regulatory expectations for Day One of Consumer Duty.

How did we get here?

Despite firms starting early and running as far (and as fast as) possible to fully implement the Duty, there has simply not been enough time for firms to have developed fully formed strategic and technological response to the Duty and fully implement all required changes.

This can come as no surprise to the FCA. The whole industry has spoken with a single resounding voice about the implementation timeline being too short. Consequently, as the deadline looms, reference to firms achieving `substantive compliance' and the FCA being 'pragmatic in their oversight' have been delivered via FCA speeches. These are designed to provide a degree of reassurance that the FCA is not expecting perfection from Day One. However, beyond this, to date, there has not been anything more definitive about what this means in practical terms.

What are the key questions for assessing 'substantive compliance'?

It is important to highlight upfront, that there is not a single definitive or explicit threshold of 'substantive compliance'. The FCA will flex its view. As such, the answer of 'substantive compliance' for each sector and indeed each firm will be different. For example, sector maturity will play a role. Although notionally, the finish line is in the same place for all firms, sectors will not have had the same starting point. Due to existing regulatory requirements in relation to pricing and value and product governance for some sectors, means that these firm can expect a higher/different bar in terms of what `substantive compliance' under Consumer Duty means.

Substantive compliance piechart
1. Can you evidence that you have taken action against all requirements?
It sounds obvious but firms will need to demonstrate that it has considered the impact of all relevant rules under the Consumer Duty. Consequently, firms will need to have taken action in response to every aspect of the FCA's new rules and guidance (even if the action is confirmation that no changes are required or that activity is deferred until Day Two). Firms cannot leave any aspect of Consumer Duty untouched. For example, having a fully embedded pricing and value framework will not obviate the firm from needing to consider sludge practice. Where action is required and implemented, it is accepted that the solution may be tactical, include a manual workaround and use data proxies, for example, but it will illustrate that the firms has taken steps to meet all the requirements.
2. Can you evidence that you've addressed the biggest gaps and impacts?
With the FCA tacitly acknowledging that not all gaps will be addressed by Day One, the FCA has moved its focus to the next priority. The FCA has signposted to firms that effort should be focused on the biggest gaps and impacts. Therefore, firms should look to see how they can evidence that it has sought to address the areas that will have the biggest impact on outcomes for customers. Indeed, this may help firms re-prioritise in-flight plans to ensure resources are being diverted to the right areas. This is likely to be a combination of the firm's largest products (by customer numbers) as well as those that have the more material gaps, higher risk and/or more complex to align to Consumer Duty. Therefore, firms should be ensuring that focus on smaller volume products, niche processes and ad-hoc letters are captured, but carried over into Day Two activity.
3. Can you show that you have considered FCA's priorities (both sector- and firm-specific)?
Aligned to the above, the FCA has specifically stated that “it will always tackle the biggest risk to consumer harm first”. To assist firms on this approach, the FCA has issued Dear CEO letters for each of its portfolios (groups of firms delineated by different business models). Although there is a degree of commonality across this suite of letters, by having the ability to flex its approach to the 40 or so business models, the FCA can be quite specific about granular risks and issues. Firms will need to therefore document their approach to addressing the relevant risks within the relevant portfolio letter(s) to show their alignment to considering FCA priorities. Further, where a firm has current crystallised risk(s) that it is engaging with the FCA on, the firm should capture how these have been reconsidered to ensure future proposed actions are appropriately aligned to FCA's post-Consumer Duty expectations.
4. Have you developed a robust and funded Day Two implementation plan?
If the above three actions are sufficient to demonstrate that the firm is achieving 'substantive compliance' on Day One, there will inevitably be residual activity required to achieve full compliance. Therefore, part of achieving 'substantive compliance' must include the reassurance that the firm is able to evidence the identified enhancements, costings and associated timescales to fully implement Consumer Duty. Firms should develop a robust and deliverable (potentially to the same rigor and detail as the October implementation plan) to illustrate that the firm knows where the gaps are, how to fix them and by when.
5. Can you evidence the decisions have been subject to effective governance and are aligned to internal policies?
Once a firm has reached a conclusion on its approach to achieving, and critically evidencing, 'substantive compliance', it will need to ensure that it is aligned to existing controls and has been subject to appropriate governance. For example, firms will want to verify that the proposed approach to determining and evidencing 'substantive compliance' is aligned to its existing risk appetite and cultural values. Firms with materially different risk appetites, will reach very different conclusions on where the 'substantive compliance' bar is set. Similarly, firms will need to have developed an approach to determining between Day One requirements and those that can be deferred until Day Two. Further, the conclusions reached and robustness of the evidence should also be agreed within the firm's existing governance arrangements. This may well include escalation up to Board — especially as the role of the Board champion is likely to have a specific interest.

Next Steps

Whilst navigating the above process may feel like an extra task the firm doesn't have time for, as it will have an adverse impact of the firm's existing implementation plans themselves, it is a vital activity to evidence the approach. It ensures that the firm has a formal position in relation to substantive compliance if/when the FCA challenges the firm on how it implemented Consumer Duty. It also formalises the firm's Day Two plans to ensure that they are part of a governance plan and funded. Finally, it gives the firms a genuine first taste of how the FCA may seek to supervise firms in an outcomes and data led landscape. If there is one phrase to conclude with in terms of how firms should approach substantive compliance, — don't let perfect be the enemy of good.

For KPMG's further thoughts on how the FCA will seek to supervise Consumer Duty, please see our article here.

All KPMG's other articles on Consumer Duty are accessible on our Consumer Duty Hub.

If you'd like to discuss KPMG in the UK's view on substantive compliance further, hear from one of our specialists on our other insights/implementation challenges or require specific support on your Consumer Duty implementation plans, as you race to the finish line, please do not hesitate to get in touch.

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