Is consumer understanding the keys to the kingdom of Consumer Duty



Giving customers the information that they need, at the right time, and presented to them in a way they can understand is, in the Financial Conduct Authority’s (FCA) words, “an integral part of… creating an environment in which customers can pursue their financial objectives”.

Consumer understanding is considered to be a key component of the consumer outcomes of the Consumer Duty and an area where the FCA is looking for changes.

As Clare Hughes, Partner at Addleshaw Goddard highlighted during the AFC 2022 Winter Conference, “consumer understanding could be the answer to Consumer Duty.” This sentiment is shared by many in the financial services industry, with customer understanding being seen as the keys to the kingdom of Consumer Duty.

At the heart of the consumer understanding outcome are a handful of principles: using clear and timely communications, tailoring them where appropriate, and testing them to see if they are supporting your clients’ understanding and decision making. The key point for firms to consider is whether a communication is likely to be understood by the likely recipients. These rules apply to all communications, not only promotional material, and so cover the entire product or service lifecycle.

“Consumer understanding could be the answer to Consumer Duty.”

Clare Hughes, Addleshaw Goddard

Consumer understanding represents the opportunity to take consumers on a journey – sell them a product that they understand, communicate that product in a way they understand, have a journey which supports that understanding and delivers on expectation, and take them all the way through the entire product usage that they expect and that makes sense. By performing good customer understanding in a binary way results in a reduced number of complaints.

Hughes feels that, “Consumer understanding represents an opportunity to engage with our consumers, find out who they are, and how we can best communicate with them, in an effective way, the messages and products we want to communicate to them.”

“Consumer understanding is the key element that carries the consumer with you through the process of Consumer Duty.”

Clare Hughes, Addleshaw Goddard

Fiona Hoyle, Director of Consumer & Mortgage Finance and Inclusion at the Finance & Leasing Association believes that Consumer Duty “is a fundamental seismic change in regulatory expectation with regards to how we interact and provide services to our customers.”

Hoyle finds that customer communication has always caused challenges for businesses, especially in the consumer credit arena. This resulted from a starting challenge with asset, motor and consumer finance products being seen as enablers. People don’t start out on this journey – they want to buy an end-product and the finance product always falls in second place.

“Consumer Duty is a fundamental seismic change in regulatory expectation with regards to how we interact and provide services to our customers.”

Fiona Hoyle, Finance & Leasing Association

A complex but ageing regulatory framework, including the archaic 1974 Consumer Credit Act, presents further challenges to businesses especially in today’s digital world. This brings with it complexity and requirements especially in the online customer journey, where innovations have progressed, but customer communications haven’t.

However, Hoyle sees hope and positive change on the horizon, moving faster than anticipated, with the reform of regulation and publication of consultation papers driven by consumer understanding. The FCA has been looking at clearer communication for some time, with the Smarter Consumer Communications Consultation Paper 2015 highlighting that customers do not engage with longer communications.

Nina Babou, Head of Underwriting at Novuna Business Finance highlights that there needs to be a notable shift in our mindset from products to customers, and we should be designing our thinking towards customers from the outset.

Companies should be looking at their own teams, particularly in the product research, development and marketing phases where a diverse team is needed to see all aspects of Consumer Duty through varying consumer lenses. Babou’s view is that D&I must be ingrained in the company and the product, and how we think about our customers; it must be systemic and at the core of the business.

“D&I must be ingrained in the product and how we think about our customers; it has to be systemic and must be at the core of the business.”

Nina Babou, Novuna Business Finance

NatWest Group’s Behavioural Science & Applied Psychology Lead, Meera Shah, questions what we need to do to ensure there is that customer understanding:

  1. Be clear about who your customers are.
  2. Representation internally is reflective of representation externally – this is a good way of seeing what customers need and want.
  3. Understanding and researching what is happening in the country economically at the moment and how the situation is affecting customers.
  4. Average reading age in the UK is 12 years old – therefore communications must cater for this reading age – we need to look at communications and step back and see how it reads.

To effect the cultural change that is needed with Consumer Duty, NatWest’s Helena Thernstrom believes that an iterative approach is essential with a need to constantly measure. Shah feels that we need to look at statutory communications and see what is missing and look at consumer behaviour data.

To enhance consumer understanding, Shah sees the need to build an element of trust amongst customers and colleagues. The fundamentals of trust come down to three core components that are essential to Consumer Duty:

  1. Competence – ability to do what they say they can do.
  2. Integrity – act in line with stated values.
  3. Benevolence – acting in the best interests of your colleagues/customers irrespective of your bottom line – might be profit-making but this is not your ongoing intention.

These fundamentals of trust are basic elements which should already be part of every company’s values and philosophy, but the FCA have implemented Consumer Duty as they obviously feel that businesses are not going far enough.

Consumer Duty will change the current mindset of businesses and customers, according to Shah, and will help businesses to focus on understanding the customer.

“Consumer Duty unlocks a better way to understand our customer.”

Meera Shah, NatWest Group

According to Addleshaw Goddard’s Clare Hughes, Consumer Duty and particularly consumer understanding can be seen as a shifting opportunity for the industry: “If we genuinely embrace Consumer Duty and engage with consumer understanding in good faith, then it has the opportunity to build trust, and allows the asset finance sector to be seen as a reputable industry that takes care of its customers.”

Consumer Duty through the lens of consumer understanding offers the industry an opportunity to reflect on their products and the customers, providing an opportunity to unlock certain aspects of the customer journey.

By shifting perception and customer engagement, companies will be able to re-baseline what they do, presenting them with the ultimate opportunity and challenge, according to Hughes, where they can facilitate the customer’s journey through consumer understanding.

NatWest’s Meera Shah sees that, “Consumer Duty unlocks a better way to understand our customer,” and through our data we can provide a more personalised customer journey. However, Shah feels that companies do not use this data to its full potential and need to look more fully at the breadth of available data to see how it could be used to better understand the customer base and then cater for their needs.

As Helena Thernstrom summarises, “Consumer Duty and consumer understanding requires us to take account of a whole complex package; looking at the product itself and looking at the target market, who are you talking to, how is it all put together, so there should always be a little bit of caution in thinking that a one-size-fits-all approach applies.”

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Analysis from Clare Hughes

Partner, Addleshaw Goddard LLP

The FCA’s flagship initiative, Consumer Duty, has a number of layered component parts. Clearly the new Principle 12, the duty “to deliver good outcomes for retail customers”, is the overarching requirement but below that, on the next layer, the various outcomes are key to achieving compliance.

Outcome 3 – customer understanding – is potentially the most important outcome for firms to get to grips with. The customer understanding outcome requires firms to think about the products they sell, how they are sold to customers: what is said, how they are explained, and the methods of communication used to facilitate a greater level of understanding on the part of those buying the products. But the story does not end there.

Firms will need to think about how the product is serviced and whether or not that is in line with the customer’s understanding and expectations, how they explain the things which are done post-sale and the transparency with which they share information.

These things make customer understanding so important. The idea seems to be that if a customer buys a product they understand, and it operates in a way they expect, there is less scope for poor customer outcomes. When seen in this light, customer understanding is so much more than just re-writing your terms and conditions in plain language and getting them accredited. Customer understanding becomes a vehicle by which you can build relationships with your customers – a way to rebuild the public’s trust and confidence in financial services.