Consumer Duty: Consumer understanding

Consumer understanding is one of four outcomes under the Consumer Duty that represent key elements of the firm-consumer relationship, and comprise of a suite of rules and guidance that set out more detailed expectations for firms under the duty.

The Consumer understanding outcome is broader than specific disclosure requirements and applies to all financial promotions, other advertisements and communications provided to consumers, including verbally.

While firms must continue to comply with regulatory disclosure requirements, they must also consider the purpose of their communications and the outcomes they are focused on in order to meet the FCA’s expectations under Consumer Duty.

Financial Promotions Guide

Home

1.0 | About Evolution Funding

2.0 | What is a financial promotion?

2.1 | Consumer understanding

2.2 | Representative APR

2.3 | Representative example

2.4 | Prominence

2.5 | Regulatory disclosures

FCA Principle 7 states:

“A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.”

The Consumer understanding outcome incorporates and builds on Principle 7, by requiring firms to:

Support their customers’ understanding by ensuring that their communications meet the information needs of customers, are likely to be understood by customers intended to receive the communication, and equip them to make decisions that are effective, timely and properly informed.
Tailor communications taking into account the characteristics of the customers intended to receive the communication – including any characteristics of vulnerability, the complexity of products, the communication channel used, and the role of the firm.
When interacting directly with a customer on a one-to-one basis, where appropriate, tailor communications to meet the information needs of the customer, and ask them if they understand the information and have any further questions.
Test, monitor and adapt communications to support understanding and good outcomes for customers.

In their finalised guidance, the FCA provide examples of good practice in the way information can be presented to consumers:

Layering

Engaging

Simple

Relevant

Well timed

Layering

Key information (such as the key features, benefits, risks and costs of the product or service) is provided upfront with cross-references or links to further detail.

Engaging

Designing communications in a way that encourages engagement with them. Key information should be easy to identify, for example through headings and layout, bullet points, display and font attributes of text. Use of tables, graphs, diagrams, graphics, audio-visuals and interactive media can make the communication more engaging.

Simple

Where possible, jargon or technical terms should be avoided. If unavoidable, explain the meaning of key terms in plain and intelligible language that consumers are likely to understand.

Relevant

The FCA expects firms to “bring the most important information to the attention of consumers in an accessible way”. Consider the appropriate level of detail, taking into account the information that customers need to know, the kind of decision to be made by the recipient of the communication, and where confusion could arise

Well timed

Firms should communicate with customers in a timely manner and at appropriate touch points throughout the product life cycle, in order that they can make effective decisions on an informed basis.

Clear, fair and not misleading

CONC 3.3.1 R (1) states, “A firm must ensure that a communication or a financial promotion is clear, fair and not misleading.”

A financial promotion must:

Be clearly identifiable as a financial promotion

Be accurate

Be balanced, with the benefits and risks/exclusions given equal importance

Be likely to be understood by the target audience, or those likely to receive it

Use plain language

Be easy to read/hear

Do not be misleading, and provide all important information so that the customer can make a fully informed decision

Be clear on who is making the financial promotion

Be clear on the name of the lender (if known) if the communication or promotion relates to credit broking

Some examples of business practices that are likely to fall foul of the clear, fair and not misleading rules include:

Stating or implying that a firm is a lender where this is not the case

Misleading a customer as to the availability of a credit product

Concealing or misrepresenting the identity or name of the firm

Using false testimonials, endorsements or case studies

Using false or unsubstantiated claims as to the firm’s size or experience or pre-eminence

Restrictions

As per CONC 3.5.12R, the following words and expressions are restricted, and should only be used in line with the guidance below.

“Interest free”

Can only be used where there are no interest charges or fees of any kind.

“No deposit”

Can only be used if there is no advance payment of any kind.

“Gift”, “present” or any similar expression

Can only be used where there are no conditions which would require the customer to repay the credit, or return the financed item.

“Weekly equivalent” or any similar expression or other periodical equivalent

Can only be used if weekly payments or other periodical payments are provided for under the agreement.

The FCA may ask you to substantiate any claims you make in your advertising, so be prepared for this and make sure you could provide evidence if required, e.g. low rates, competitive rates, etc.

FCA - Misleading terms

In a ‘Dear CEO’ letter issued to consumer credit firms in May 2022, the FCA highlighted the use of phrases such as “no credit check loans”, “loan guaranteed”, “pre-approved” or “no credit checks” in promotions by credit brokers. The FCA stated that while a credit broker may not conduct a creditworthiness assessment itself, they are concerned that this could mislead consumers into believing that the lender will not carry out any checks on their credit status.

0% finance

There are different rules where a financial promotion is completely free from interest or charges for the term of the agreement. You can promote 0% finance without triggering the need for either a representative APR or representative example.

Promotions of interest-free products are not exempt from any other regulations however, and must remain clear, fair and not misleading for consumers.

Read more about the clear, fair, and not misleading rules and general requirements in CONC 3.3 of the FCA handbook here.