How testing can deliver fairer and clearer customer communications
July 2023
Fair and transparent customer communication has never really been off the FCA’s regulatory agenda. Over the years this has been apparent through the FCA’s work on smarter consumer communications, the undertakings it has sought under the Consumer Rights Act 2015, and more recently through the consumer understanding outcome under the Consumer Duty. The list definitely doesn’t end there, as the FCA is due to consult on a new disclosure regime for retail investments in the next few months.
The Duty in particular has sharpened the regulator’s focus on good customer outcomes. From the end of July 2023 firms are expected to support their customers’ understanding by ensuring that, among other things, their communications meet the information needs of their customers, and are likely to be understood by their target customer group(s). Further, firms should ensure that their communications enable their customers to make effective, timely and properly informed decisions.
With respect to the new disclosure regime for retail investments, the FCA’s goal is to create a clearer and more flexible, decision-useful regime, which enables consumers to make evidence-based investment decisions. Importantly, the FCA states that the Duty will help it design a new disclosure regime which is similarly outcomes-focused and provides flexibility for firms. In this article we discuss customer communications with reference to the Duty, but the discussion remains relevant to those firms impacted by the upcoming disclosure regime.
So what are the challenges that firms face in meeting the regulator’s higher expectations for customer communications under the Duty, and how can they be overcome?
Ensuring customer understanding is not an easy task
Ensuring customers have the information they need, when they need it, and in a way they can understand is crucial to delivering good customer outcomes. But this is easier said than done, for the following reasons:
- A large proportion of the UK population lacks financial capability: it is well documented that the average reading age of UK adults is nine years old and less than a quarter of the working-age population (24%) has the numeracy level equivalent to a GCSE pass (Grade 4). In addition, studies have shown that consumers struggle to understand financial products.
- Customers don’t always engage with financial products or communications: the topic of financial products is not of interest to everyone, some consumers don’t always see the benefits of engaging with the detail and are happy to be told a certain product is right for them without needing to know why. In addition, ‘present bias’ means customers are more inclined to focus on short-term than long-term rewards.
- Financial products are inherently complex: while an argument can be made for financial providers to simplify their products and / or better explain them, it is not always that simple. Financial products can be necessarily complex, making it difficult for consumers to fully understand the structure, pricing and terms and conditions of many financial products.
Measuring customer understanding is crucial but challenging
Therefore, testing communications to ensure they engage the customer, enable them to understand and digest key messages and nudge them to act (where relevant) is crucial. But there are several challenges in creating an effective testing programme:
- There is often a gap between claimed and actual understanding: consumers have a natural overconfidence bias, and may assume that they understand financial information even when this is not the case. This is demonstrated by recent PwC research* which showed that 88% of UK adults felt confident or very confident in making financial decisions. However, we then asked some basic multiple choice questions about common banking products. Of those who felt confident, only between 33% and 39% correctly answered these - and given there is a 20% probability of someone guessing the correct answer, this doesn’t tell an encouraging story about actual understanding.
- It's difficult to track understanding: if we can’t ask customers directly if they understand the product they hold or the communications they’ve read, this makes understanding hard to track. In reality, customer understanding often only becomes apparent when something goes wrong, for example complaints arise related to rejected claims or unexpected charges.
- The high volume of customer communications: as the Duty applies to communications sent across the entire product lifecycle and in all forms (for example, text messages and call scripts), firms need to carefully prioritise which ones to test.
How should customer testing be approached?
The FCA recently reminded firms of the top ten questions they should be asking themselves ahead of the Duty’s deadline. These include questions on the effectiveness of testing communications and how communications are being adapted to meet the needs of customers with characteristics of vulnerability. These questions are intended to help firms reflect on their implementation of the Duty and identify gaps for improvement, which suggests this is an area of focus for the regulator and there is more for firms to do to meet the FCA’s expectations. Below, we set out a list of factors that firms should consider to effectively and meaningfully test customer understanding of their communications. This list will be helpful for firms when reflecting on the consumer testing exercises they have already performed, as well as with respect to ongoing compliance with the Duty beyond the July deadline:
- Decide what to test: there will be commonalities across different communications (for example key messages, actions required), so firms should group communication types accordingly. It is then advisable to prioritise those that pose the highest risk of customer harm through misunderstanding. An example of a higher risk communication would be communicating the need for a repayment vehicle for a customer taking out an interest only mortgage.
- Decide who to test the communications with: testing should be carried out with the target market - individuals who hold a specific product (or are considering taking it out) - to ensure the communications are tested with the relevant audience. Importantly, firms should also explore the views of those in more vulnerable situations e.g. those with lower financial literacy, lower digital confidence or cognitive impairments. If communications work for these audiences, they should be understood by others.
- Decide how to test: testing can be performed in a variety of ways, such as online surveys and individual interviews, depending on the risk profile and the nature of the product / service and communications. Regardless of the method(s) used, testing has to involve more than just asking customers if they understand a communication. They need to be asked what the key messages are so that understanding can be drawn from this. In addition, the setting for the testing needs to reflect, as far as possible, the environment in which the individual would naturally interact with the content, to minimise any external influence on their responses as might happen in a group situation where more knowledgeable participants can affect responses. Creating an environment where the individual feels comfortable to share their understanding (or lack thereof) is crucial. In this spirit, firms should consider how existing customer satisfaction measuring tools can be utilised to observe customer understanding, and identify areas that may need improving.
- Monitor customer interactions: testing customer understanding needs to be monitored, and the results reported to the board under the Duty. Monitoring should take place on an ongoing basis through continuous observing, listening and categorisation of customer interactions. For example, consider how to identify customer confusion and how to respond to this, or consider which parts of a digital product onboarding journey customers might struggle to understand. Experience management technology platforms can be leveraged to identify, on an ongoing basis, customer signals that represent a lack of understanding, so that mitigating action can be taken quickly. It is this kind of continual monitoring of outcomes and quick action that the FCA is looking for, to truly deliver better outcomes under the Duty.
Take actions to address issues identified through testing and monitoring: where firms identify poor outcomes, they must take the necessary steps to rectify the causes of these outcomes. This is particularly important ahead of the Duty, as firms should consider how any learnings from testing / monitoring on one set of coummunications, might apply to wider communications. Firms should consider what interventions(s) would be appropriate where poor outcomes are identified. This could include amending communications to make them more easily comprehensible, changing the point at which certain communications are delivered within the confines of regulatory rules, and considering developing mediums which provide a more interactive communication experience for customers, such as online dashboards.
At PwC Research we have tried and tested solutions to support your communications testing, including the experience management technology platforms to enable continuous monitoring, helping you provide the evidence required by the FCA to meet your Consumer Duty obligations and deliver good customer outcomes.
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