Consumer Duty: The inside track on consumer understanding

5 min read 29 Sep 22

Of all the outcomes from the FCA’s Consumer Duty, consumer understanding may have the biggest implication for advisory firms. Here’s why…

It will come as absolutely no surprise that communicating to clients clearly and punctually goes some way to delivering good outcomes for them.

Giving clients the information they need, at the right time, and presented to them in a way they can understand is, in the FCA’s words, “an integral part of… creating an environment in which customers can pursue their financial objectives”.

This is the FCA’s ‘consumer understanding’ outcome, one of four identified as part of the Duty, and the one we believe has the biggest potential practical impact on advisory firms, mainly due to its applicability to suitability/reasons why letters.

At the heart of this outcome are a handful of principles: using clear and timely communications, tailoring them where appropriate, and testing them to see if they are supporting your clients’ understanding and decision making.


Clear communications

There is a simple test – one referenced by the FCA – that can improve your chances of communicating clearly: the ‘put yourself in your clients’ shoes’ test. Asking yourself each time you build a communication whether a (real or imagined) client would be likely to understand it can be a useful exercise.

You should avoid designing communications which – intentionally or not – exploit clients’ “information asymmetries and behavioural biases”. The example the FCA gives is from its review of investment platform costs and charges, which found useful information was often spread out across multiple web pages.

It also referenced the funeral plan sector, pointing out product information too often focused on benefits over plans’ limitations, costs, and risks.

One question you can ask yourself is whether you apply the same standards to all communications as you may do to any designed to help generate sales. Communications sent to clients about investment performance should be at least as clear as those reminding clients to top up their ISAs, for example.


Tailored communications

The good news: This is not about creating bespoke communications for individual clients (though you are welcome to do that if you wish).

Instead, tailoring communications under the Duty is about being aware of any defining characteristics of your clients – or segments of clients – and adjusting accordingly.

When interacting directly with a client on a one-to-one basis, where appropriate, tailor your communications to meet their individual needs, and ask them if they understand the information and have any further questions.

When designing communications, the FCA recommends you consider what you know (or could reasonably be expected to know) about the sophistication, financial capabilities and vulnerability of any clients who will receive it.

As you will already, you should take particular care when communicating with consumers in vulnerable circumstances, and follow the FCA’s guidance for firms on the fair treatment of vulnerable customers.


Timely communications

In the world of financial services, you know as well as anybody that clients’ circumstances can change dramatically over time. Where appropriate, your communications should reflect this, which may include prompting customers to consider if products or services continue to meet their needs.

Timely communications are, in the FCA’s words, communications which provide clients with relevant information “at an appropriate stage in the customer journey”. Where any communication has a ‘call to action’, you should allow clients enough time to review it before deciding what to do.


Testing your communications

This principle is, we believe, directed mainly at product manufacturers, but there can be no harm in applying it to your communications too.

In a nutshell, the FCA wants you to monitor whether your communications are supporting your clients’ understanding and helping them make effective, timely and informed decisions. Testing your communications is one way to find out.

The regulator acknowledges that your capacity to test in this way will be commensurate with your resources and capabilities, so this might stretch to direct feedback from clients but may not go much further than that.

If you use any communications produced by a manufacturer, and feedback or testing identifies an issue with them, you should feed this back to the provider.


Things you don’t need to do

The FCA said it appreciates not all clients are guaranteed to engage with or fully understand all aspects of your communications. Therefore, your litmus test is to consider whether yours “are likely to be understood by their intended recipients”, or not. This is the (albeit somewhat subjective) test you should apply.

Helpfully, when it comes to your communications, the FCA has also pointed out four things you won’t need to do. These are: tailoring each and every communication to individual clients; using every available channel each time; testing every communication; and verifying that all clients have understood everything.


Consumer understanding

Plenty to consider then. Plainly and simply, the FCA, not unreasonably, wants you to communicate in a way that is likely to be understood. If you apply the ‘in your clients’ shoes’ test, you are unlikely to go far wrong.

Next up in our ‘Final word’ series we’ll take a closer look at the Duty’s ‘consumer support’ outcome, one in which you’ll be pleased to know most advisers are already doing well.


Four tips for more effective communication

The FCA has provided some guidance for building effective communications. Here are its four top tips…

Layering your communications

This refers to providing key information upfront (perhaps via email) with cross-references or links to further details. This approach can be particularly effective online. The FCA recommends however that information, at all points, should be consistent and coherent. For example, similar language should be used in both your upfront and referenced communications.

Being engaging

Communications should be designed in a way that encourages engagement, so thought should be given to headings, layout, bullet points, even fonts. Devices such as tables, graphs, diagrams, graphics, audio-visuals and interactive media should also be used where appropriate.

Being 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 (if any), and where confusion could arise. The ‘customers’ shoes’ test helps.

Keeping it 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.

Mike Barrett is Consulting Director at the lang cat

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