FCA issues fresh guidance on Consumer Duty’s consumer understanding outcome

In a recent episode of the Inside FCA podcast (7 pages / 150KB PDF) about the Duty’s ‘consumer understanding’ outcome, the regulator said that firms which sell products across a wide group of consumers, “should not assume that consumers are sophisticated or have a good understanding of financial products”. It added that the average consumer “has quite poor knowledge of financial services and finds it quite difficult to deal with more complex communications”.

According to the FCA’s finalised guidance (121 pages / 1.13MB PDF) on the Consumer Duty, the consumer understanding outcome requires firms to give consumers the information they need, at the right time, in a way they can understand. It said consumers “can only be expected to take responsibility where firms’ communications enable them to understand their products and services, their features and risks, and the implications of any decisions they must make”.

Daniela Ivanova of Pinsent Masons said that, while the FCA’s latest intervention “will not be news to a lot of product providers”, it was a useful reminder for firms “as they simplify their product terms and conditions, by, for example, seeking accreditation with the Plain English Campaign or by enlisting the help of charity organisations that work with vulnerable customers.”

The FCA also urged firms to prioritise implementation work based on the risk of poor outcomes, and on firms’ assessments of where they are likely to be furthest away from the standard of the Consumer Duty. It said firms should focus on the communications that are most important for consumers in terms of making choices, and criticised generic communications that contain information which might be relevant to one recipient but not to another.

Venetia Jackson of Pinsent Masons warned that the regulator sees consumers as being more likely to overlook important communications when they must wade through a lot of text and identify information that applies to them. “While the FCA does not expect every communication to be individually tailored to a customer, firms should consider prioritising their generic communications and considering whether they can be more tailored to groups of customers or better signposted to help guide a consumer to what is relevant to them.”

The consumer understanding outcome also requires firms to deliver communications that: meet their customers’ needs; are likely to be understood by customers; and enable and support them to make effective, timely and informed decisions in addition to being fair, clear and not misleading. Firms must tailor the communications to take into account the characteristics of the intended recipients, including any characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm. They must also carry out appropriate testing of communications before they are sent to customers. In its guidance, the FCA has referenced a number of testing methodologies that firms should consider.

Jackson said firms should consider their testing approach carefully, especially since their size and scale may lead the FCA to expect a greater level of testing. She said: “It is worth paying close attention to a ‘rule of thumb’ set by the FCA that testing for the Consumer Duty outcomes should be comparable to testing for the purposes of maximising sales and revenue.”

“A good starting point could be adding consumer understanding questions to marketing surveys, though consideration also needs to be given to the likely completion rate of such surveys. Product providers that do not distribute their products will be expected to check with their distributors for consumer feedback on the literature and communications they design,” Jackson said.

“The FCA’s expectations pose challenges for firms seeking to explain concepts that many customers may find complex such as insurance excesses, for example. It remains to be seen what the FCA will consider as likely to be understood by customers. A firm producing communications for a niche investment product suitable only for sophisticated investors, or where a product requires the consumer to take financial advice, will have a different expectation of customer understanding within their target market compared to the typical customer for a mass market fixed term savings account,” Jackson said.

She added: “Firms could usefully consider the presentation of information in formats other than text, such as flow charts and graphs to assist with comprehension. Another useful suggestion coming from the regulator was for firms to train communications champions who can independently review communications from a consumer angle.”

The FCA has provided examples of types of comprehension questions that would be appropriate depending on the purpose of the communication. If, for example, the goal of a communication is to convey the cost of a product, an objective follow-up comprehension question would be ‘what was the cost of the product?’

Ivanova said that firms “should not be shy of asking exam-type questions” for more complex communications and where the risk of foreseeable harm is higher. She added: “The FCA has warned against exercises that present the consumer with a communication and merely ask them if they have understood, because people may want to avoid appearing foolish and may just say yes, regardless of whether they really understand the information.”

In a recent review of implementation plans, the FCA highlighted firms’ intention to use detailed metrics to measure consumer understanding as an example of good practice. These metrics could include marketing data, percentage of customer facing content being tested and percentage of customers who take the expected action after communication.

Ivanova advised firms to document their approach to testing, as well as every testing exercise and its results – and the decisions they make as a result – in order to be prepared for potential FCA scrutiny. “In addition, there is an expectation that this should not be a one-off exercise, but a planned ongoing assurance process, so firms should also consider how to make periodic testing sustainable in the long run,” she added.

The FCA also made clear that the consumer understanding outcome does not require firms to tailor all communications to meet the needs of each individual customer. However, where a customer is receiving a personalised service or interacting on a one-to-one basis with a firm and being asked to make important or complex decisions, firms should take a more tailored approach by asking the customer if they understand the information they have been given and if they have any further questions.

Jackson said: “This is where building adaptations into the customer journey and communication channels will be key. These adaptations could include visual accessibility, having documents available in Braille or in a foreign language, additional support, as well as allowing extra thinking time in telephone calls and online chats.”

“This is also an important area of overlap with the FCA’s vulnerable customers guidance, so firms that have already adapted their systems to identify and assist vulnerable customers will be one step ahead.”