FCA Outcome 3: Consumer understanding

What happened?

TCC’s Associate Director Neil Dethick set out three practical considerations for firms addressing the Consumer Duty’s consumer understanding outcome, following comments from the FCA’s Nick McGruer, Head for Advisers, Wealth and Pensions, that independent financial advisers would shortly receive a “Dear CEO” letter on delivering good advice.

The outcome requires firms to give retail customers the information they need, when they need it, in a format they can understand, whether communications are delivered verbally, online or in print. Neil highlighted that the FCA’s own Duty rules cite research showing one in seven adults have literacy skills at or below those expected of a nine to eleven-year-old, a benchmark firms designing mass-market products need to keep in view.

He also pointed to testing as the practical route to compliance: firms should review and continually refine communications, asking whether each one is genuinely relatable, and apply the same rigour to consumer-understanding testing as they do to testing designed to maximise sales.

Why does it matter?

Consumer understanding sits at the centre of the Consumer Duty’s requirement that firms act to deliver good outcomes for retail customers. Communications that use complicated contractual language, or that are not tested against the audience they are aimed at, create an unnecessary barrier to customers making informed decisions.

Neil Dethick noted that the FCA expects firms to apply the same standard of rigour to consumer-understanding testing as they already apply when testing communications designed to drive sales, closing a gap that has historically favoured commercial outcomes over customer comprehension.

Who is affected?

The outcome applies to every retail-facing firm across wealth management, pensions, banking, lending, general insurance and protection, and motor finance, wherever verbal, online or printed communications are used with retail customers.

It is particularly relevant to firms serving mass-market audiences, where the FCA expects literacy levels to be taken into account, and to those supporting customers with characteristics of vulnerability, including older customers less comfortable with digital channels and more anxious customers who may prefer digital tools to phone conversations.

Key risks

• Communications that assume a level of literacy or financial understanding higher than a significant proportion of the target audience actually has.
• Contractual or product language that is technically accurate but creates an unnecessary barrier to understanding.
• Applying less rigorous testing to consumer-understanding communications than to sales and marketing communications.
• Using a single communication channel that does not suit the vulnerability profile or preferences of the target market.

Actions to take

1. Map the communication channels used across the customer journey and check they suit the target market’s likely vulnerability characteristics.
2. Review printed, verbal and digital communications for language, format and length, considering the FCA’s literacy benchmark.
3. Test communications with representative customers, asking directly whether the content is relatable and actionable.
4. Apply the same testing standard to consumer-understanding communications as to sales and revenue-focused communications.
5. Build ongoing review of communications into business-as-usual monitoring rather than treating testing as a one-off exercise.

Wider implications

The consumer understanding outcome cannot be evidenced through policy alone; the FCA has made clear it expects firms to test communications in practice and demonstrate the results. Firms that have historically prioritised testing for commercial effectiveness will need to extend that same discipline to customer-facing content.

Vulnerability characteristics also change over time, so firms need a mechanism for keeping pace with a customer’s circumstances rather than assessing vulnerability once at onboarding.

Recommendations

Firms should prioritise testing of communications used with mass-market products and with customers known to have characteristics of vulnerability, since these are the areas the FCA is most likely to scrutinise.

Building a documented testing and review cycle, with clear ownership at board level, will help firms evidence that the consumer understanding outcome is being met on an ongoing basis rather than assumed.