Consumer Duty – Consumer Understanding as an undoubted challenge but an even bigger opportunity

Consumer Duty – what do the changes mean? 

As we are all aware, the Financial Conduct Authority (FCA) are bringing in the new Consumer Duty, which has the potential to fundamentally improve how firms serve consumers. In its simplest form it will raise the standards for how financial services firms care for their customers. This goes further than the existing Principle 7 and includes asking for improvements in consumer understanding of communications.  

‘The current economic climate means it’s more important than ever that consumers are able to make good financial decisions. The financial services industry needs to give people the support and information they need and put their customers first.’  

Sheldon Mills, Executive Director of Consumers and Competition 

Where before there has been a prescriptive approach to regulation, the Consumer Duty is about embedding a cultural change. The FCA wants to leave some flexibility for firms to work out what works best in practise with their customers. This isn’t a box ticking exercise, where a one-size fits all approach will work – instead it’s about putting the customer at the heart of everything that firms do. 

The initial deadline of the 31st  July is fast upon us. This deadline requires that firms implement the new rules for all new and existing products and services and show their implementation plan for the future.  

Acknowledging the Challenges 

The Consumer Understanding outcome is the one which appears to be creating the greatest challenge for firms. 

One of the biggest challenges is purely practical – some firms have tens of thousands of communications. Identifying them, reviewing them and making sufficient improvement by the deadline could be a mighty headache for some, particularly with tight timeframes between the confirmation of rules and the implementation deadline. Firms should have prioritised key communications that are currently most distant from the needs of the Duty and more likely to cause foreseeable harm before the deadline. However, the implementation must be ongoing beyond July 31st and there should be plans for the other changes over time.  

Also, it’s difficult to know what good looks like against the outcome. It is not as black and white as a certain proportion of customers need to understand a communication and it is certainly not the case that the regulator expects every customer to understand every communication. Our research shows that current consumer understanding is surprisingly low. Therefore, it’s crucial that firms see the Duty through a realistic lens and don’t let a desire for perfection get in the way of making improvements. If they do so they risk being overwhelmed and achieving nothing at all. Firms need to be positive and proactive in doing more to aid understanding – not achieve miracles.  

“The outcome rules do not require firms to verify that all individual customers have in fact understood the information provided. Rather, firms should take appropriate steps to satisfy themselves that their communications are likely to be understood by their recipient.”  

– FCA Consumer Duty Guidance 8.71 

Exploiting the opportunities  

Having said all that, at its core the idea that more customers should understand key information so they can make informed decisions is not controversial to most firms.  

In fact, it is something that many firms, and individuals within firms, have wanted to do for some time. With Consumer Duty firms and their staff should be looking to exploit the opportunity that this longstanding issue can finally be given organisational priority. The changes many want and need to see have long been a “nice to have” – but now they have the leverage to be business critical.  

It’s not just the customer that stands to benefit either. For the firm, there are opportunities to use better customer understanding to reap the commercial rewards. If a consumer has a better understanding of a purchased product they will ultimately have less questions to ask and less complaints to make. A higher level of comprehension can mean that there is less leg work on the firm's part throughout the products life cycle.  There are reduced calls to call centres, less time chasing payments, and ultimately there’s a potential for there to be less overheads.  

There are further commercial benefits that a consumer is more likely to take recommended actions where they are in both the interest of themselves and the firm. For example, paying more into their pensions, moving to a better mortgage rate or taking up a special offer which makes credit card payments cheaper.  

Where a customer can understand the communications because they see them as clear and fair, they are likely to feel there is a level of transparency and their interaction with the firm can feel less stressful. Both their image of the brand can often improve, and their feeling of brand loyalty may increase.  

Imagine being a potential customer buying a product online – if you don’t understand the product there are three options. You could either buy it without understanding, go without it or close the window and go to a competitor’s website. None are optimal for the business. Consumer Duty gives the opportunity to start addressing these issues.  

How Plain Numbers is helping our Partners  

All firms should satisfy themselves they have a reasonable basis to believe that their communications are likely to be understood by customers. This is where our Partners are at an advantage - we’ve tested our Plain Numbers Approach and it works. We saw comprehension levels double in some of our testing.  

It is also the case that the Duty’s final guidance acknowledges the importance of poor numeracy as a customer vulnerability that should be taken into account as part of communicating with customers (Guidance 8.34) and references the work of Plain Numbers as a way firms can improve comprehension (Guidance 8.13).  

Our Partnerships are for a minimum of three years – so firms can feel assured of having access to Plain Numbers support for the ongoing implementation way beyond July 31st.