Culture and the Consumer Duty

"We want to set a higher expectation for the standard of care that firms give consumers"

FCA

Given the heightened expectations of the Consumer Duty, creating and maintaining the right culture in the light of new regulatory expectations will be pivotal to a firm's successful implementation — and ongoing compliance.

This article explores culture from the perspective of the Consumer Duty and highlights challenges and possible solutions for firms.

What does a good culture look like?

Culture is difficult to define, and as acknowledged by the FCA, there is no one definitive view of `good culture'. Each firm will need to map its own route based on its core purpose, values, customer base and business model. As noted by Andrew Bailey when he was Chief Executive of the FCA, culture is "everywhere and nowhere”. In simple terms, culture is a set of values and standards influencing attitudes, behaviour and thinking in an organisation underpinned by written and unwritten rules. If you reward behaviour or actions that advance or reflect your desired culture, that positive culture will strengthen and thrive whilst the opposite will weaken it and evolve culture in a different, potentially harmful way.

When considering your culture in the context of the Consumer Duty these five questions may help you decide what it means for your firm:

1. Do you have an articulated vision for your culture?

Does this support the tenets of the Duty and the delivery of good customer outcomes?
Are any changes required to ensure successful implementation and embedding of the Duty?

2. How will you achieve buy-in for your vision for the organisation's culture that incorporates the expectations of the Duty?

3. How will culture be reinforced at all levels of the organisation and how will this be measured to ensure the desired culture has been embedded — and will be maintained?

4. How will this vision for culture feed into your reward and recognition framework?

5. How will the successful embedding of culture be informed by customer outcomes testing?

Culture and the Consumer Duty

The need for an organisational culture that supports good conduct is not new to the Consumer Duty. The FCA has made no secret of its long-held view that a good organisational culture drives positive consumer outcomes.

"An effective culture is one that supports a business model and business practices that have at their core, the fair treatment of customers and behaviours that do not harm market integrity."

Clive Adamson,
CEO, FCA 2013

Over time, thinking has evolved from a focus on setting the right 'tone from the top' to a more holistic view of the need for the right culture to be embedded at all levels of the organisation — the 'tone from the top' reinforced by an 'echo from the bottom'. This holistic approach echoes the Consumer Duty's intention that good outcomes are embedded throughout customer journeys, and within every department. Replace 'fair treatment of customers' with 'good customer outcomes' in the quote above and the FCA's expectations around firm culture under the Consumer Duty are easy to understand. Whilst the emphasis and phraseology has changed, the intentions have not.

Establishing and reinforcing an appropriate culture will play an integral part in a firm's ability to successfully implement the requirements and remain aligned to the FCA's Consumer Duty expectations. Culture should evolve beyond a mindset of rule-based compliance to a feeling of a shared responsibility for ensuring the right outcomes.

The advent of the Consumer Duty may not necessitate a wholesale change in a firm's culture. However, it would be unwise for firms to be complacent, particularly as the FCA has stated that 'the Duty will require a significant shift in both culture and behaviour by many firms'. A good starting point is to ensure definitions of good customer outcomes are aligned with the firm's culture, vision and values. Once these definitions are captured, firms should update organisational understanding and practices accordingly. The FCA expects culture to be a component of a firm's Consumer Duty implementation process and expects firms to be able to evidence tangible action such as:

Documented plans to embed the Duty in its purpose/values/strategy and reward structures.
An appropriate incorporation of the Duty in its people and training approach.

Such enhancements to culture could drive larger benefits such as a decreased risk of regulatory issues, enhanced customer reputation and loyalty, and an increased ability to attract and retain talent.

Getting the balance right

The FCA's heightened expectations raise regulatory jeopardy around culture failures that impact on customer outcomes. How can firms approach organisational culture in this context? There are a couple of pitfalls to avoid:

1. Poor risk tolerance calibration

Firms should have a culture, backed up by sound policies and procedures that prevents deliberate or reckless actions impacting on customer outcomes. However, mistakes will be made — systems and humans are not infallible. It is how mistakes are addressed and lessons learned that will be a defining feature of the culture in place.

Firms will want to exercise great care when determining their risk tolerances for the FCA's Consumer Duty expectations. For example, taking an extreme position could result in firms feeling as though they must to adopt a zero or extremely low tolerance for mistakes for fear of increased regulatory sanction. However, this message could have an unintended negative impact on employees' wellbeing and mean that mistakes are not readily surfaced and addressed. Instead, mistakes are hidden — compounding them or missing an emerging risk resulting in a larger issue downstream. Poorly calibrating risk tolerance will not support a firm's intention to deliver good customer outcomes or minimise regulatory risk.

2. Failure to reinforce desired culture

A leadership that says it expects a culture focused on good customer outcomes (whilst also accepting mistakes will be made) but (i) does not reinforce this through communications or actions and / or (ii) is seen to reward behaviour not in line with good customer outcomes will not nurture a culture that can successfully deliver against the Duty.

Critically, the successful delivery and embedding of this culture requires both words and deeds.

Approaches will vary between firms but there are elements that can provide a strong foundation for the development of a good, effective, culture:

A strong “tone from the top” supported by sound governance within all lines of defence.
Desired culture and purpose is understood and embedded at all levels of the organisation.
An appropriate reward and recognition system that recognises and incentivises desirable behaviour.
An accountability framework that addresses poor or harmful behaviour.

For example, a positive culture will have leaders, at all levels, who regularly talk about good customer outcomes and the behaviours they expect to see:

Employees are encouraged to speak out where they identify negative behaviours or outcomes.
There are regular and open discussion of learnings and actions taken to resolve any mistakes.
Rewards and incentive schemes feature customer outcome metrics tailored to the role and responsibilities of the employee.

"The FCA expects senior leaders to nurture healthy cultures in the firms they lead. Cultures that are purposeful. That have sound controls and good governance. Where employees feel psychologically safe to speak up and challenge. Where remuneration does not encourage irresponsible behaviour that can ultimately damage the business and wider markets."

Emily Shepperd
Chief Operating Officer
FCA 2022

Given the lack of prescription in the Consumer Duty rules, the FCA's views about the behaviour it expects will continue to evolve as it sees how firms have interpreted and implemented the Duty. This will necessitate that firms regularly check and challenge their approaches to ensure they continue to support the delivery of good customer outcomes and meet evolving regulatory expectations. Equally firms should use their own outcomes data to assess how well its desired culture is operating and where there are indications of divergence take necessary action to address this.

Conclusion and next steps

Addressing organisational culture to support the delivery of good customer outcomes is not straightforward and will require careful tailoring, to ensure that it fully embraces the intentions of the Duty. However, a good culture will reward in a number of ways and as the FCA transitions to being an outcomes-based regulator, the role that culture plays will become of increasing importance from a supervisory perspective too. All the more reason to fully embrace and embed what Consumer Duty is seeking to deliver.

How can KPMG support?

KPMG in the UK has specialists with experience supporting firms with organisational transformation and reward and recognition frameworks. If you would like to hear from one of them or require specific support on your Consumer Duty transformation, please do not hesitate to get in touch.

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