In this fifth blog in our series on the new Consumer Duty (CD), I will focus on what I believe the ‘Consumer Understanding’ (CU) challenges will be for firms under the new CD rules as well as providing some suggestions on the steps firms can take.
Under principles 6 and 7 of the FCA’s principles of business, firms have clear duties with regards consumers, i.e.
6. Customers’ interests
A firm must pay due regard to the interests of its customers and treat them fairly.
7. Communications with clients
A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair, and not misleading.
However, in the consultations leading up to the final guidance, the FCA has been clear it wanted to set a higher standard for firms to follow, e.g. “We think it is appropriate to use different language – ‘good’ rather than ‘fair’ – to acknowledge that this is a different, higher standard”, and “the new Duty goes further than Principles 6 and 7 and is a clear break from existing terminology”, (PS22-9, section 4). So, despite some feedback from the industry for more lenient wording, the FCA has stuck with its intentions for this new higher standard, i.e., “a firm must act to deliver good outcomes for retail customers.” This becomes the new Principle 12, and it replaces Principles 6 and 7 (except in areas not related to CD).
So, when the FCA says; “We want firms’ communications to support and enable consumers to make informed decisions about financial products and services. We want consumers to be given the information they need, at the right time, and presented in a way they can understand”, (PS22-9, Section 8), the FCA says this against this new, higher standard of expectation.
To add to the challenge, the FCA stops at being prescriptive in how firms should go about delivering this higher standard. Instead, the FCA says firms must ask themselves whether their communications are reasonable given the characteristics of the customer, the nature of the product and role of the firm. The statement, ‘nature of the firm’ is interesting as it has several connotations; one aspect is the FCA have indicated they would expect to treat smaller firms with proportionality given smaller firms will often lack the resources and expertise of bigger firms. Another aspect of ‘nature of the firm’ however is likely to be more of a challenge, that being that the FCA expects manufacturers to ensure their communications are having the intended effect even though they may not have a direct relationship with end customers, i.e. the firm is a manufacturer rather than a distributor.
That said, the FCA does provide guidance through five practices of good communication and provides plenty of examples of good and poor practice. It also, provides insights into how communications should be structured using findings from its consumer research. In brief, the principles are:
- Layering: Provide information in a coherent accessible format and when further information is necessary, links are provided that enable logical navigation.
- Engaging: The information is written in a way that engages the reader and ‘draws them in’ and, if written, is formatted for easy ‘access’ and to make the information more digestible, e.g. research by the Behavioural Science Team provides many helpful examples for providing information in ways that increase understanding.
- Relevant: Firms need to consider the type of product, the purpose of the document, the intended customers and so the level of information required. Whilst the principle of ‘shorter is better’ the above needs to be adapted according to need.
- Simple: Communications should strive to be jargon free and use plain language, that uses standard terms and seeks to present potentially difficult points, e.g., costs, in the simplest and most open way possible. Again, the FCA provides guidance, e.g., government guidance that web pages should be written for people with a reading age of 9 years old and that 34% of adults have poor or low levels of numeracy involving financial concepts, (FG22-5, Sections 8.34 and 35).
- Timely: Firms need to communicate with customers at key points in the product lifecycle, so helping customers to understand and make the best possible decision at that time.
Whilst not part of these five practices, the FCA also expects firms to embrace two further behaviours in their communications:
- Tailored: Communications should be tailored to the needs of the target customers. Whilst simple in principle, this is likely to get more complicated in practice, e.g., having material relevant to both the core target customers and vulnerable customers within that core target.
- Testing: Firms should check that the information provided is understood by consumers as intended and so can act accordingly in their best interests. This means firms should test their intended information before finalised, and once communicated, that it has had the intended effect in practice. Testing that information is understood is straightforward in a verbal scenario but checking understanding of written communications is more complicated and takes much more effort.
Combined, these factors set a very high bar for firms to jump.
For me, the CU consumer outcome creates five key challenges for firms:
- Asymmetries and Bias: In their communications with consumers, firms need to work to reduce the disparity between the information known to the firm and that understood by the customer. Using the practices listed above, firms need to work hard to reduce these asymmetries and, in doing so, reduce the risk of behavioural biases in customers’ decision making. However, in doing so, firms need to be mindful of all the suggestions made in the final guidance about how to best communicate with customers.
- Customer Types: Whilst the FCA acknowledges that firms can’t communicate with consumers on a one-to-one basis, equally they have made it clear that a ‘one-size fits all’ approach will not work. Consequently, firms need to work hard to define their target market and, within that, their customer ‘personas’ within that market. Once done, material should be tailored according to the needs of these customer ‘personas’.
- Simple, Timely and Appropriate: Sounds simple, but providing the right level of information, in the right format at the right stage in the product lifecycle will be key to delivering better CU.
- Testing: I have said it before, but one of the key challenges for firms is that the incoming Duty requires firms to think ‘outside in, not inside out’. In other words, it will no longer be enough to change existing or create new processes and procedures. To ‘put themselves in the customers’ shoes’ firms need to test the impact of their actions with customers. As such, firms will need to become far more familiar with researching the impact of their communications on consumers. And to do this, they will need to broaden the skill sets in their marketing and communications teams, e.g., include psychometrics professionals for survey design and behavioural scientists for data analysis and presentation
- Governance: Deciding how this whole area of work will be overseen and the collected data interpreted and fed back into the marketing and communications teams will be key because with the new approach to consumer communication, many new decisions will need to be made, e.g. evaluating the testing data against the ‘reasonableness’ test, how this data-set will be stored and be ready to evidence the firms’ decisions to the FCA if required.
In summary, CU represents a major challenge for firms, one that is new and different. I very much doubt whether replicating or tweaking what has been done in the past will satisfy the new standard. So, whilst not exhaustive, I hope these thoughts and suggestions can help you guide your firm towards delivering better outcomes for customers.
In my next, and sixth blog, I will turn my attention to Consumer Support and what firms can do to deliver this outcome.