What’s the scope?
This obligation is extraordinarily broad and applies to any communication between a firm and its retail customers, including generic marketing, agreement documentation and post-contract notices.
As well as being relevant to the content of communications, importantly the rules also bite on how information is presented and delivered. For example, much of the FCA’s Finalised Guidance focusses on online sales journeys and discusses whether information should be presented across different webpages and the benefits and risks of using mobile devices. As a result, firms will need to carefully examine all of their customer-facing channels to assess whether they support the Consumer Understanding Outcome and whether communications should be presented in different ways across different channels. This includes sales journeys and post-sale servicing as well as customer support and complaint channels.
Don’t firms already have to do this?
In recent years, there has been a real focus on the quality of consumer communications. This has resulted in a number of overlapping sector-specific requirements designed to help support consumer decision making, along with the FCA’s Principle 7 which requires firms to communicate in a way which is “clear, fair and not misleading”. However, the results have not been entirely consistent. Whilst many firms now send concise and user-friendly information by email, SMS or push-notification, not all firms are comfortable reducing complex legal concepts to a few bullet points. This means that many customers continue to receive lengthy agreements and notices peppered with legal jargon, definitions and unnecessary information.
The FCA acknowledge that there are already a number of sector-specific requirements in place and have said that, whilst firms should continue to comply with all existing disclosure obligations, the Consumer Duty requires them to take a “step back”, consider their approach holistically and ask themselves whether there is more they need to do to support good outcomes.
Some firms will consider their holistic approach and conclude that they already comply with the Consumer Understanding Outcome, but the FCA will nevertheless expect evidence of how the firm arrived at that conclusion and whether it is supported by testing and monitoring. Other firms will likely need to do much more to demonstrate compliance and may need to rewrite a significant number of communications or rethink entire customer journeys.
Tailoring communications
PRIN 2A.5.4R requires a firm to consider its ‘target market’ when drafting product-specific communications. They should tailor communications to the characteristics of that target market, taking into account any customer vulnerabilities, the complexity of the product and the communication channel used.
This is a helpful reminder that the Consumer Understanding Outcome doesn’t require all communications to be as simple as possible. Where the target market is exclusively high net worth individuals and the product is complex, it would be reasonable to send lengthier communications containing more sophisticated language. This is particularly important where consumers should be warned of risks or costs associated with the product which would be hard to describe in simple terms.
Problems might crop up where a product is designed for the mass market and the target market is huge. This could include consumers with a wide range of ages, sophistication and vulnerability and it is hard to see how communications can be ‘tailored’ to such a range of needs. The FCA has commented in its Guidance that it doesn’t expect every single communication to be tailored to meet the needs of each individual customer and instead, firms should design communications to be as inclusive as possible whilst clearly signposting additional support (such as telephone banking or alternative formats) for those who need it. For some firms, this could mean a complete rewrite of all communications or a fundamental rethink of their ‘house style’, whereas for others it might require a few simple tweaks.
How simple is too simple?
The FCA Guidance contains suggestions of how firms should ‘support customer understanding’, including “use plain and intelligible language”, “make key information prominent and easy to identify” and “avoid providing too much information.” In particular, the FCA has acknowledged that financial literacy is generally fairly low and the average adult reading age in the UK is 9-11 years old.
Certain products have potential to cause substantial harm to consumers if the right information isn’t given. For example, mortgages are inherently complex and high-risk; large amounts of money are at stake and customers’ homes are potentially at risk. Arguably it wouldn’t be helpful to oversimplify the risks of taking out a mortgage, as it’s crucial that consumers understand what they are signing up to. Firms will therefore need to balance the need to explain things in a simple way against ensuring that consumers have complete and accurate information which allows them to make an informed decision.
To layer or not to layer?
The Consumer Understanding Outcome becomes particularly tricky when certain information is already prescribed by law. For example, the Consumer Credit regime requires that consumers are sent highly prescribed and complex information, both pre and post-contract. Whilst the information is very important, the language and format requirements arguably conflict with much of the Consumer Understanding Outcome rules. The FCA suggest tackling this with a ‘layering’ approach whereby some complex information is pulled out into separate communications and explained simply and clearly.
At the same time, the FCA Guidance warns against information being split across different webpages or documents and suggests that relevant information should be displayed together. It will therefore be a challenge for firms to strike the right balance between giving the proper weight to important legally prescribed information and essentially asking consumers to review a simplified version of that information. This risks the prescribed information being ignored completely, which arguably isn’t helpful from a consumer understanding perspective.
How can you measure success?
The new rules require firms to test communications before they are published and monitor the impact of those communications, “where appropriate”. Whether this is appropriate depends on various factors listed, including the purpose of the communication, the context and the characteristics of the intended recipients. Communications should be adapted where testing demonstrates that the content is being misunderstood or there is evidence that the communication is not resulting in good consumer outcomes.
Whilst the FCA acknowledge that not every communication needs to be tested before being sent, it expects firms to take a proportionate approach. In its Guidance, the FCA suggests that firms look at how they test communications sent for the purpose of maximising sales and revenue, and take a comparable approach to testing communications for the purpose of ensuring good outcomes. In particular, firms should consider which questions to ask as part of the testing to ensure that the recipient understood the key purpose and message in the communication. The FCA comments that even distributors who don’t produce the communications should be involved in the process and give feedback to the manufacturer where the distributor’s interactions with end consumers suggest that the communication causes confusion.
The testing requirements will present significant challenges for all firms in the distribution chain, which will need to ask themselves (i) which communications to test, (ii) how testing will take place and which measures will be used to measure good outcomes, and (iii) how to implement the results of the testing. This will be particularly difficult for smaller firms and newcomers with limited financial resources.
Next steps
Firms should be well into the process of reviewing communications and developing testing strategies before the end of April 2023, when the FCA expects firms to have undertaken the bulk of their reviews. Firms will then need to implement changes before the 31 July 2023 deadline for new and existing products or services that are open to sale or renewal.” If your firm is still grappling with the Consumer Understanding Outcome, please contact us at Hogan Lovells.
Authored by Julie Patient, Elizabeth Greaves, and Virginia Montgomery.
