In our third webinar of this 4 part series, we looked at the consumer understanding outcome under Consumer Duty. The goal of the consumer understanding result is to make sure that firms assist and empower customers to choose financial products and services wisely. Firms will have to give customers the information they require when they need it, and in a format they can understand.
The FCA has published new product governance standards that are relevant to all sectors. The criteria, however, won't be applicable to products and services covered by the present product governance rules found in PROD 3 (for MiFID financial instruments), PROD 4 (IDD and pathway investments), or PROD 7 (funeral plans).
Have a read below of the questions which were asked during the webinar which our in-house experts have answered.
1. How do you propose firms should approach the understanding outcome for vulnerable clients?
The consumer understanding outcome rules retain the obligation under Principle 7 for firms to communicate information in a way which is clear, fair and not misleading. But they also build on, and go further than, Principle 7 by requiring firms to:Firms should take particular care when communicating with consumers in vulnerable circumstances, taking account of their needs. They should follow the FCA Guidance for firms on the fair treatment of vulnerable customers.
Firms may wish to consider taking an inclusive design approach to their communications. Inclusive design is a methodology that involves understanding the range of customer needs and designing products and services to be accessible and benefit as many customers as possible. Fair by Design and the Money Advice Trust have produced a practical guide for firms on inclusive design.
For example, research has found that one in seven adults have literacy skills at or below those expected of a nine- to 11-year-old. Our Financial Lives Survey also found 17.7 million adults (34%) have poor or low levels of numeracy involving financial concepts. So, if a firm is developing communications in relation to a simple mass market product, for example, the FCA expects it to take these characteristics into account and communicate information in as simple a way as possible to support understanding for these customers.This information is likely to include:
2. How can we guard against overwhelming the customer with information when looking to implement the consumer understanding outcome?
The FCA expects firms to adopt good practices that generally enhance the clarity of communications. This will support consumers in making effective decisions by selecting products that help them pursue their financial objectives. For example, communications can be more effective when they meet the following points.
• Layering: This is where key information is provided upfront with cross-references or links to further detail and can be particularly effective online. The key information is likely to include any action required by the customer and any consequences of inaction. If the customer needs to make a choice about a product or service, the key information is likely to include the key features, benefits, risks and costs of that product or service. This is important as research by the Financial Capability Lab has highlighted that consumers often rely more heavily on the first piece of information they encounter when making decisions. Research carried out as part of the Asset Management Market Study found that consumers are less likely to read information that is hidden or requires them to seek it out.
• When layering, firms should ensure the information they provide is coherent. So, for example, if a firm is providing a package of information to a customer and highlights key product features in a cover letter, those features should be described in a way that is consistent with other documents. If this is not the case, the overall package of information will not be coherent – and this will undermine customers’ understanding. Firms should also layer information in a way that is effective. For example, providing some, but not all, information upfront on costs or spreading this information across several documents is unlikely to support consumer understanding. A better approach could be to put all relevant information about a particular issue in one place or layer it in a way so that it is all inter-linked.
• Engaging: Communications should be designed in a way that encourages consumers to engage with them. This is particularly important where the communication is prompting the consumer to act. The key information should be easy to identify. For example, by means of headings and layout, bullet points, display and font attributes of text. Design devices such as tables, graphs, diagrams, graphics, audio-visuals and interactive media can also improve the effectiveness of communications by making them more engaging. For example, research by the Behavioural Insights Team found that using a question-and-answer format to present key contractual terms improved consumer understanding by 36%. And summarising key terms and illustrating them with explanatory icons – to reduce the amount of information given in one go – increased consumer understanding by 34%.
• Relevant: Firms should consider the appropriate level of detail for each communication. They should take into account what customers need to know, the kind of decision to be made by their recipients where applicable, and where confusion could arise. For example, information on a simple, low-risk product intended for mass market consumers, such as a personal current account without an overdraft, is likely to involve a different style of communication than would be appropriate for a complex investment or pension product. Firms should avoid unnecessary disclaimers. Key information can be overlooked if detail is provided that is unnecessary for a particular communication, and information overload can deter consumers from engaging with communications. Shorter, concise communications are more likely to be read and understood. Lengthy and technical communications can confuse or overwhelm readers. Firms should help consumers to navigate the information they provide, explaining relevant context and any jargon or technical terms in a simple way. Recent work, such as by Plain Numbers, has demonstrated how seemingly small changes to communications can substantially increase comprehension among consumers. We expect firms to ensure they bring the most important information to the attention of consumers in an accessible way.
• Simple: Effective communications will present information in a logical manner. Where possible, jargon or technical terms should be avoided. Where the use of jargon or technical terms is unavoidable, firms should explain the meaning of key terms in plain and intelligible language that consumers are likely to understand. This will also help to build consumers’ trust. Absolute costs and standardised terms can help to keep communications simple and aid consumer understanding, helping them to compare different options available to them.
• Well timed: Firms should communicate with customers in a timely manner and at appropriate touch points throughout the product lifecycle, such as at contractual breakpoints, giving them an appropriate opportunity to take in the information and, where relevant, assess their options. This will help to put customers in a position where they can make effective decisions on an informed basis.
3. How far does the customer priority need to be considered in the organisation planning for resources?
The expectation set by the FCA is that firms should be appropriately resourced in order to meet their regulatory requirements and obligations, and this certainly applies to the implementation of Consumer Duty. As part of a firm’s implementation plan there should be an assessment of whether it has adequate resources in place in order to ensure it is able to meet the four outcomes.
If we use the consumer support outcome as an example, if as part of the firm’s assessment it recognises that it needs to improve its post-sale support to bring it in line with its pre-sale support, it may consider the appointment of an appropriately qualified individual to oversee its operations at this level. Equally, if the firm feels it has adequate skill but perhaps is lacking resource, then more junior staff may need to be recruited. The assessment may extend one step further and actually investment and resource committed to the firm’s digital communication and support journey might be more appropriate, such as enhancing its webchat function in a post-sale environment, or enhancements made to its post-sale digital environment.
4. Do distributors value assessments on their service need to be provided to end clients?
No, this is not required
5. For smaller firms who don’t have the facilities to test communications, what pratical steps can they take to evidence that their consumers understand the communications?
Firms should test communications “where appropriate”.
Firms should develop an approach to testing that provides assurance that customers can identify and understand the information needed to make effective decisions.
This information is likely to include:
You can watch the recording of this webinar here.
Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in a meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.
For more information about this webinar series and how we can help you with your Consumer Duty arrangements, implementation support, framework review, or ongoing support speak to the team by calling 0207 436 0630 or send an email to info@thistleinitiatives.co.uk.