FCA Consumer Duty – a closer look at the four outcomes. Outcome 3: Consumer Understanding

Welcome to the third instalment of our guide exploring each of the FCA’s four Consumer Duty outcomes. You’ll no doubt have spotted rather a lot of news and views out there already on the Consumer Duty but our guides are designed to take a deeper dive beyond the headline points and get to the heart of the really important detail for advisers.

So, if you haven’t already, give parts 1 Products and Services and 2 Price and Value a read before making your way back here because you’re not going to want to miss what we have to say on outcome 3, as it’s arguably the most impactful for advisers and providers alike.

Outcome 3 is all about Consumer Understanding and from April 2023 when the Consumer Duty is due to be introduced, all firms will be expected to go beyond the current Principle 7, ‘clear, fair and not misleading’, when communicating with customers. The FCA wants consumers to be given the information they need, at the right time, and presented in a way they can understand.

All things communication

The scope for these rules is wide, essentially applying to any firm involved in the production, approval or distribution of consumer communications. And that’s irrespective of whether the firm has a direct relationship with a retail customer. This includes where a firm produces or approves financial promotions, sales-related communications and post-sale communications.

The detail of the scope becomes increasingly clear when you consider that the rules will also apply at every stage of the product or service lifecycle, extending from marketing to sale and post-sale service. And, yes, this encompasses all communications whether verbal, visual or in writing between a firm and a customer, including to potential customers.

Building on ‘clear, fair and not misleading’

As we’ve said already, outcome 3 goes further than the existing Principles of ‘clear, fair and not misleading’, with the FCA outlining a range of specific ways it expects firms to communicate information to customers so they are equipped to make decisions that are ‘effective, timely and properly informed’.

Some of this criteria appears fairly straightforward at first glance, with the FCA stating that information provided to retail customers needs to be accurate, relevant and provided on a timely basis. So far, so good.

But things start to get a little more detailed when the FCA states that communications should be understood by the ‘average’ retail customer intended to receive the communication while also tailoring these to more specific customer information needs and characteristics, including vulnerability, the complexity of products, the communication channel used, and the role of the firm.

The FCA also wants checks to be made to ensure that the customer understands this information (when a firm is dealing one-to-one directly with a customer). And tests and monitoring need to be carried out on an ongoing basis to support this understanding, with communications adapted accordingly. 

Step into the customers’ shoes

So, lots for firms to be considering. As part of this process, the FCA suggests you should “put yourselves in the customers’ shoes”, assessing whether the communications equip customers with the right information, at the right time, so they understand the product or service in question and ultimately make effective decisions as a result.

The point about tailoring communications to ensure they are appropriate for the target market (see my previous blog on outcome 1 Products and Services for more on this) will be particularly crucial, especially for customers in vulnerable circumstances.

A not so good example

This doesn’t mean every communication will need to be tailored to meet the needs of each individual consumer but you will be expected to alter the information as required for different groups of consumers. As an example, the FCA highlights the following as poor practice…

“We have seen cases where firms have sent a single and extremely long communication to all customers, covering a range of issues, with customers left to work out which bits of the communication are relevant to them.

“Firms should consider if they can better segment or target communications to make them more relevant to the intended recipients, rather than adopting a ‘one size fits all’ approach.”

Source CP21/13. FCA

More on monitoring communications

It’s also worth taking a moment here to think more closely about how the FCA expects firms to monitor whether communications support customer understanding. For example, there may be a notably lower response rate than reasonably anticipated following a communication prompting consumers to take action, such as an advisory request for authorisation to switch funds or rebalance a portfolio.

This may indicate that the communication has not supported consumers’ understanding or provided them with the information they need to make an effective decision. Firms will be expected to collect and make use of relevant MI to pick up on this type of situation and identify areas where improvements can be made.

What next?

As with all these outcomes, the FCA’s definitive position may evolve when the final rules are published later this year. And while current timescales mean these rules may not have to be implemented until April 2023, out of all the four outcomes this does feel like the one that might require the most change in order to be fully compliant.