The Consumer Duty – the consumer understanding outcome

The proposed consumer understanding outcome rules might appear, on the face of them, to be less significant than the other consumer outcome rules. However, the FCA is clear in CP21/36, A new Consumer Duty: feedback to CP21/13 and further consultation (issued on 7 December 2021), that consumers can only be expected to take responsibility for their financial decisions where firms’ communications enable them to understand their products and services, the features and risks of those products and the implications of any decisions the consumer makes. The section of the draft guidance in CP21/36 relating to the consumer understanding outcome is longer than the sections on the other consumer outcomes and contains more examples than those provided for the other outcomes. Consumer understanding is considered to be a key component of the consumer outcomes and an area where the FCA is looking for changes.

Under CP21/36, the draft consumer understanding outcome rules require firms to:

  • Support their customers’ understanding by ensuring that their communications meet the information needs of retail customers, are likely to be understood by the average customer intended to receive the communication and equip them to make decisions that are effective, timely and properly-informed;
  • Ensure they communicate information in a way which is clear, fair and not misleading;
  • Tailor communications taking into account the characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm;
  • Ensure information provided to retail customers is accurate and relevant, and is provided on a timely basis;
  • Tailor communications to meet the information needs of individual customers and check the customer understands the information, where appropriate, when a firm is interacting directly with a customer on a one-to-one basis; and
  • Test, monitor and adapt communications to support understanding and good outcomes for retail customers.

Some thoughts on aspects of the proposed consumer understanding outcome rules and the FCA guidance are set out below and a key point for firms to consider is whether a communication is likely to be understood by the likely recipients. The rules apply to all communications, not only promotional material, and so cover the whole of the product or service lifecycle.

Tailoring communications to the likely recipients

Considering whether consumers are likely to understand a communication requires consideration of:

  • The nature of the communication – for instance, a communication relating to arrears will be different from a marketing or sales communication;
  • The likely recipients of that communication; and
  • The potential for risks of harm to the customer if the communication isn’t understood.

Firms therefore need to assess the make-up of the target market for each product and service that they offer in sufficient detail to be able to assess the capabilities of the likely recipients. Bear in mind the following points:

  • Firms have to consider what they know or could reasonably be expected to know (emphasis added) about the sophistication, financial capability and vulnerability of customers. This is consistent with the theme of knowing the customer and the target market that applies across the Consumer Duty.
  • This level of knowledge is needed across the consumer groups that make up the likely recipients for a communication. It follows that the consumer groups need to be identified in order for this level of knowledge to be applied, once it’s been obtained for the groups.
  • It would be prudent to assume a low level of sophistication and capability unless there’s clear and robust evidence to the contrary. The FCA mentions in the draft guidance that one-in-seven adults have literacy (not financial literacy) skills at or below those expected of 9-11 year olds.
  • Firms aren’t expected to tailor all communications to meet the needs of each individual consumer (although that will be appropriate in cases of one-to-one communications). However, mass-marketing could result in poor outcomes if firms know (or ought reasonably to have known) that customer groups within the intended recipient community don’t have an appropriate level of sophistication or capability for the communication or experience characteristics of vulnerability that make the communication unsuitable. This might present a problem where, for instance, a website or app-based communication is accessible to all groups and so would need to be pitched accordingly.
  • There appears to be an assumption in CP21/36 that communications will deal with only one product or service. Websites, in particular, are likely to include information about more than one product or service and the points in CP21/36 will need to be addressed in relation to all screens and pages that lead to the specific product or service information, with clear signposting and information at all stages in a form suitable for the relevant target market.

Points to consider when presenting information in a communication

The FCA lists five points to consider when presenting information in a communication.

  • Layered – layering information is seen as a way to support customers in making effective decisions. This involves highlighting key information, with cross-references or links to further details. It can be particularly useful and effective where there are space limitations (for instance, on a mobile app) or where information is to be accessed online. Points to consider include:
    • Firms will need to decide what comprises ‘key information’ in the context of the relevant product or service and the intended recipients of the communication, but that’s likely to include key features of the product or service, benefits, risks and costs. How key information is scoped will need to be documented, along with details of the decision-making process and the rationale.
    • Although layering information can be a tool to enhance consumer understanding, it needs to be managed carefully. Other points the FCA has highlighted could run counter to the benefits of layering – for instance, by resulting in complexity and not engaging the reader.
  • Engaging – the FCA asks firms to consider how they can encourage consumers to engage with a communication through good design, audio-visual and interactive features and other approaches. This is familiar when considering how to maximise sales but the message here is about consumers engaging with key information. Consider the following points:
    • The draft guidance says that, if a communication is engaging from a sales perspective, it is likely that extra care will be needed to ensure key information is at least as engaging to intended recipients. This requires an assessment whether a communication is engaging from a sales perspective (and documenting that assessment) in order to identify whether any further steps need to be taken in order to make the key information more engaging.
    • There might be a case here for ‘positive friction’, keeping the consumer’s attention on the key information rather than moving on.
    • Testing (see below) will almost certainly be needed to consider whether a communication engages intended recipients in relation to the key information and whether the features that a firm considers to be engaging to the likely recipients are, in fact, engaging to them. The questions asked to assess engagement will probably need to be tested too; they’ll certainly need to be kept under review.
  • Relevant – the draft guidance refers to there needing to be an appropriate level of detail for each communication, considering the type of product or service and the intended recipients. Firms should avoid including any information that’s unnecessary and shorter seems to equate to better. That might, though, run counter to the push for communications to be ‘engaging’.
  • Simple – this is a similar point to ‘relevant’, although there’s also an emphasis on avoiding jargon and technical terms and including plain, intelligible explanations where they’re needed (for instance, under the Consumer Credit Act and related Regulations). Part of the reason why simple is best is that it can help consumers to compare different options available to them where, for example, costs are stated in simple terms.
  • Well-timed – the message here is that communication with customers in both a timely manner and at appropriate touch-points throughout the product or service lifecycle gives them an opportunity to take in information and, where relevant, assess options. Consider the following points:
    • Reference to the product or service lifecycle indicates that this is intended to encourage switching between products and services, rather than only applying to the sales and origination process.
    • Firms will need to decide when to communicate with customers during the product or service lifecycle and document the decision and rationale for that – see also the next section.

On-going communication with customers

The consumer understanding outcome applies across the whole of the product or service lifecycle, not only at the point of marketing, sale and origination. It’s therefore necessary to consider communications to be made during that lifecycle, and the points set out below will be relevant.

  • Communications aren’t just to tell customers about changes to the product or service, the end of a fixed-rate or introductory-rate period and similar points. CP21/36 makes it clear that customers should have information that will allow them to decide whether to switch to another provider in order to meet their needs and objectives. Firms will therefore need to consider what information they should provide to customers in order to allow them to decide whether to switch.
  • Firms will need to decide how frequently they will communicate with customers, taking account of the type of product and service and its term, as well as any legal or regulatory requirements to provide information during the lifecycle. Testing and monitoring might be needed to set – or test and review – the frequency, which will need to be documented with a supporting rationale and record of discussions.
  • It might be appropriate to set different communications programmes for different customer groups within the target market and, again, for those to be tested and kept under review for communications purposes.

Different channels of communication

Although the broad approach under CP21/36 is to be agnostic as to the channel used to communicate with consumers, limitations and issues are identified in some cases, principally in relation to digital communication channels and how information is presented. Two particular points are set out below.

  • The draft guidance refers to the amount of time given to the consumer to consider and respond to information and an appropriate amount of time is likely to be determined, at least in part, by the amount of information, how it’s given and how important it is to the consumer. Layering of information (see above) can be a helpful way of providing information, particularly on a mobile device, but there’s a risk of consumers disappearing down digital rabbit holes and losing track of key messages.
  • Navigation is a key point, with the potential to improve or inhibit understanding. Testing is likely to be needed in order to establish which is the case, recognising that firms and their staff can be too close to the material and its design to provide an objective assessment and to view the material from the perspective of the intended consumer audience.

Communications that fall within the Consumer Credit Act

The consumer understanding outcome rules emphasise the need to avoid technical language and complexity and keep communications simple and straightforward. However, there are requirements under the Consumer Credit Act and the Regulations made under it that require information to appear in a particular format that isn’t always user-friendly. CP21/36 makes it clear that the FCA would like to move to a more principles-based and outcomes-focused approach but this will require changes to the Act. This is, though, more feasible following UK withdrawal from the EU – the UK won’t be bound by the formal requirements contained in EU consumer credit legislation.

Manufacturers and distributors

The focus on the different roles of manufacturer and distributor under the product and service outcome rules and the price and value outcome rules doesn’t appear under the consumer understanding outcome rules. It seems to be assumed that manufacturers will be preparing most of the written communications although I’m not sure that will always be the case in practice. Firms will need to analyse, carefully, what communications will be made by manufacturers, distributors and any administrators or service providers, allocate responsibility and record that allocation. Sharing of information will be needed. This is an area that the guidance hasn’t addressed fully at this stage; far more work will need to be done than the guidance suggests.

Testing

This is one of the more opaque parts of the consumer understanding outcome rules and guidance in CP21/36: there are conflicting messages about whether testing is required. Not all communications will need to be tested; there’s no need for testing where there’s no significant harm to consumers. However, firms need to demonstrate a proportionate approach that provides them with confidence that consumers can understand their communications. That would appear to require testing. Deciding which communications are subject to testing will be an important point for firms to address and the points set out below are likely to be relevant.

  • Although the purpose of a communication, who it’s being sent to and the reasonably foreseeable information needs or vulnerabilities of the target audience are to be taken into account, the scope for harm seems, to me, to be a key point. This is a consumer understanding outcome, seeking to avoid harm to consumers, including where there are misunderstandings or where information is likely to be overlooked.
  • Where there is testing, the framework used for that should include testing consumer understanding and identifying and assessing risks of poor customer outcomes where a communication isn’t fully understood.
  • One of the points made by the FCA in CP21/36 is that, where firms carry out testing to identify what’s effective in maximising sales, they should also test consumer understanding to ensure good outcomes and be as robust in testing for that as they are in testing to maximise sales. This will need to be documented and firms will need to identify if there is any indirect testing to maximise sales.

Monitoring

It’s proposed that firms will monitor whether communications are supporting customer understanding and helping customers make effective, timely and properly-informed decisions throughout the product or service lifecycle. A few points to consider:

  • Firms will need to decide what will identify whether a communication – and a series of communications – support customer understanding and help customers make effective, timely and properly-informed decisions. The criteria and questions used might be different depending on the different customer groups being considered.
  • It might be possible to identify, soon after it’s made, whether a communication is having the intended effect. However, a more accurate view might not become apparent until some time later and monitoring work will need to consider both the short-term and longer-term effects.
  • On-going monitoring will also be needed to identify the impact of any changes over time to products and services referred to in the communication, as well as changes or updates to communications.
  • The frequency of reviews depends on the nature and complexity of the product or service, any indications of customer harm, the distribution strategy, the cycle of product or service review under the product and service outcome rules and other factors. It’s expected that a range of information will be taken into account and firms will need to ensure they have systems in place to collect whatever information they consider is needed and be clear about how it’s to be used in assessing whether communications are doing what firms intend.
  • Arrangements will need to be in place between manufacturers and distributors for distributors to provide manufacturers with feedback on communications the manufacturer produces.

Governance

The need for governance in relation to communications and consumer understanding outcomes isn’t as obvious as for, say, products and services and price and value outcomes. However, important decisions will need to be made about how to approach aspects of the work and a governance framework will be needed for that – for instance, in relation to testing and monitoring. There will also need to be clear policies and procedures, allocation of responsibilities, oversight, monitoring and review work, reporting (with appropriate qualitative and quantitative MI) and records to evidence what’s been done. The governance framework will need to be established at an early stage in the work so that the work programme complies with that framework. It will also need to fit with the governance frameworks for other consumer outcomes and the Consumer Duty more generally.

This article is intended to provide general information about recent and expected items that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.

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