The Financial Conduct Authority (FCA) published the Consumer Duty PS22/9 policy statement today, which also urged firms to report any companies in the distribution chain not complying with the policy.
Under ‘the consumer understanding outcome’ rule, the regulator said it wanted firms to support customers in making informed decisions about financial products and services, and said this can only be done if they are understood.
It said it wanted customers to be given the information they need at the right time and presented in a way they can understand.
“This is an integral part of firms creating an environment in which customers can pursue their financial objectives,” it added.
These rules apply to all firms involved in the production, approval or distribution of consumer communications, at every stage of the product or service lifecycle and to all forms of communication.
It said firms should consider whether they apply the same standards to ensuring good consumer outcomes as they do to generating sales and revenue, for example whether communications advising customers to switch and complain are as clear as communications to sell.
It also asked firms to put themselves in customers’ shoes, act in good faith and avoid communications which exploit behavioural biases.
The FCA said it had seen examples of consumer harm where communications encourage customers to make decisions without giving them full information on costs and exclusions.
Enabling effective decisions
The FCA said communications were more effective when using layering – which is when information is provided with cross-references and links to further detail. It also said communications needed to be engaging, relevant, simple and well- timed.
It urged firms to continue complying with existing legislative and regulatory requirements, while also thinking more widely about “the purpose of their communications, and the outcomes they are focused on, to meet our expectations under the Duty”.
Where firms relay complex information, additional steps to support consumer understanding should be considered.
The FCA said: “This outcome is also broader than other specific disclosure requirements and applies to all financial promotions, other advertisements and communications provided to consumers, including verbally – such as during conversations with advisers, online, in letters or product terms and conditions.”
Firms should also be aware of changes to a product’s or service’s features and customer circumstances and should communicate at appropriate times if changes arise.
The FCA said this was already practised in the mortgage market, where prompts are communicated before an introductory offer ends. However, even where there are existing rules, firms should see if there is more they can do. It said this was especially important with long-term contracts as it was more likely circumstances could change.
Tailored communication
The FCA said the mode of communication should always be effective, while digital means should be compatible with different mediums, such as computers, tablets and smartphones.
The regulator’s expectations regarding the provision of different channels should be met, as laid out under the consumer support outcome rule of the Consumer Duty.
Every channel of communication should give customers enough information to see if the options presented meet their needs and evaluate any risks.
If a particular channel of communication has low engagement with or limited space for lengthy documents, then the layered approach should be considered with the most important information being prioritised and any supporting information provided later or through other means.
Firms must also consider the target market and tailor communications to suit. This includes being aware of customers’ knowledge about a product or service, vulnerabilities, and literacy and numerical skills.
If it is identified that a customer wants to be communicated with in a specific way, firms are expected to take note of this and provide information in a way which is beneficial to them.
Firms are also required by law to provide information in a way that is accessible to those with disabilities.
The FCA said firms did not need to tailor all communications for each customer, nor do they need to always communicate with customers using all or a particular channel of communication. Instead, communication should meet the needs of customers.
It also said where appropriate, firms should test that their communication is understood by customers. These tests should consider the purpose of the message and whether it contains information designed to prompt or inform a decision, and how important that is.
It should also consider context, timing and frequency; the information needs and vulnerabilities of the customer, for example, whether they have low financial capability; the scope of harm if the information was to be misunderstood or overlooked; and whether it is important to communicate information urgently before testing is carried out.
Tests should be conducted with the intended target customers.
It said: “It will be more appropriate for firms to test communications where they are responsible for the production of the communication or for adapting it after testing. This might be the product manufacturer if it provides communications for distributors to use, or the distributor if it develops its own communications in relation to a manufacturer’s product.”
If a distributor uses communications produced by a manufacturer, it should provide feedback to the provider so they can adapt.
Not all communications need to be tested, the FCA said. Firms do not need to verify that each customer understands their messages, but be satisfied that it is likely to be understood.
However, in some contexts firms should ask customers if the information provided has been understood and if there are any questions.
Monitoring outcomes
The FCA said firms should monitor whether their communications support customer understanding and allow them to make informed decisions. It said testing communications could help determine this.
Low response rates or incorrect actions being taken when customers are prompted to do something can indicate communications are not being understood.
Firms should make use of management information to track the impact of communications and identify areas which may need resolving. This should also be monitored during the customer journey.
Firms should also be aware of any events which may change the content of communications and keep it updated. Also, if a firm becomes aware that another firm in its distribution chain is issuing poorly communicated notices, it should notify the FCA.
In relation to existing rules, the FCA said firms should “continue to follow product-specific rules and guidance where applicable, as they remain necessary to achieve particular outcomes” and this should not stop them from thinking more widely about their communications.
The boundary of advice
The paper’s feedback said respondents had “broad support” for this rule and agreed that the focus should be on the outcome of customer understanding.
Some respondents said they were prevented from doing more to ensure customer understanding as they were not permitted to give advice.
The FCA said the Duty does not alter the boundary of advice and firms will not be in breach if they comply within their remit.
It added: “While we are wary of reducing the consumer protections that apply for advice, we acknowledge that some consumers might benefit from communications that give a stronger steer on appropriate action to take even where the relationship is on a non‑advised basis.
“We will continue our work in this area and support initiatives we believe will lead to good consumer outcomes.”
For the full report, follow this link.
