Facts About Pridic Services

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1 August 2015 FCA Discussin Paper n Imprving Cnsumer Cmmunicatins (DP15/5) In July 2015, the FCA published a discussin paper explring smarter appraches t cnsumer cmmunicatins. The regulatr acknwledges that many firms are trying t cmply with expectatins arund transparency and infrmatin, but sets ut several areas where imprvement is necessary. The FCA undertk several strands f research t supprt discussin paper, including a literature review; rundtable discussins with several key stakehlders; reviews f practices in ther cuntries; and reviews f practices in ther sectrs, and ther research initiatives. The discussin paper then examined six specific areas where there is scpe fr imprving cnsumer cmmunicatins: Terms and cnditins: typify cnsumer cncerns abut infrmatin cmplexity and verlad. The DP encurages the industry, wrking with relevant stakehlders, t fcus n bringing abut imprvements in this area. Fees and charges: the research fund that cnsumers are best able t assess the quality f a prduct r service and whether it meets their needs when they are fully infrmed abut its key benefits and features. FOS/FSCS: there is mre the industry can d t help cnsumers t identify wh is the mst apprpriate persn t speak t when they have a cmment r query abut a prduct r service that is nt perating in line expectatins. General insurance cmmn terminlgy: the regulatr has identified a number f issues in the general insurance market that can ptentially be addressed thrugh effective cnsumer infrmatin. Cmplexity at retirement: cnsumer inertia and lack f engagement are particularly prevalent when it cmes t retirement planning and saving. Investment advice: even pst-rdr, there is an pprtunity t imprve the infrmatin cnsumers receive abut the scpe and cst f investment advice services t enable them t chse a service accrding t needs and budget. Next steps: The Discussin Paper clses n 25 September, and a feedback statement will be published later this year. The FCA use the respnses t this paper, where relevant, t infrm nging interactins with the EU and dmestic regulatrs n disclsure issues. wrk with firms t test new ideas. The results f this testing, if effective, culd infrm the regulatry apprach, lead t cnsultatin n rulebk changes and culd als influence ur negtiating strategy when Eurpean directives are (re)negtiated. Backgrund In July 2015, the FCA published a discussin paper explring smarter appraches t cnsumer cmmunicatins. The regulatr recgnises that cmmunicatins play a fundamental rle in helping cnsumers t make infrmed decisins. Effective, engaging infrmatin can be a key tl in prmting effective cmpetitin t supply prducts and services that cnsumers want. The Chartered Insurance Institute

2 Financial services cnsumer prtectin ver the last decade has relied heavily n infrmatin t help imprve cmpetitin. This has led t types f infrmatin firms shuld disclse t custmers and the frmat it shuld take. While the FCA will cntinue t d this where it feels this is necessary, the regulatr als recgnises that infrmatin itself des nt necessarily empwer the cnsumer. We knw frm behaviural ecnmics that t much infrmatin can verwhelm, cnfuse, distract r even deter peple frm making effective chices: behaviural biases, lw levels f financial literacy and the cmplexity f sme financial services and prducts can limit peple s ability t take apprpriate actin; firms tend t use financial and legal jargn, which can make the materials they prduce lengthy and impenetrable fr the cnsumer; and in sme firms, marketing material is much mre cnsumer fcused than ther cnsumer cmmunicatins greater transparency in firms cmmunicatins with cnsumers can als lead t greater efficiency fr the industry, with less time spent handling cmplaints. Regulatry cntext When utlining hw the FCA wuld advance its bjectives, the regulatr signalled that it wuld place cnsiderable emphasis n greater industry transparency, in the frm f clear pricing and clear infrmatin helping cnsumers make infrmed decisins. It investigated the difference between its expectatins f firms and firms understanding f what is required f them, particularly what impedes making infrmed decisins: regulatry disclsure material that des nt prvide cnsumers with the infrmatin they need in an accessible and understandable frmat; infrmatin verlad and excessive use f financial and legal language that stps cnsumers frm engaging; and a tick-bx apprach t cmmunicatin that is driven by uncertainty abut ur expectatins and fear f actin being taken against them FCA expectatins f firms Firms must: understand and recgnise the imprtance f cmmunicating effectively with cnsumers; create prduct and service infrmatin fr cnsumers with at least as much behaviurally infrmed creativity as is applied t business develpment, marketing and financial prmtins; and create cmmunicatins as an integral part f the prduct r service design prcess. The FCA acknwledges that many firms are ding this, and the discussin paper cnveys its supprt and encuragement fr firms that are taking steps pursuant t this: writing fr the cnsumer first and then ensuring cmmunicatins are cmpliant, rather than the ther way rund mving away frm a bx-ticking apprach t cmmunicatin design, r the perceptin that cmmunicatins driven by regulatin are the respnsibility f cmpliance and legal staff building a wider understanding f their custmers infrmatin needs and bjectively cnsidering nt nly what cnsumers actively demand t knw, but als: what the cnsumer needs t knw; hw much they need t knw; and when they need t knw it. The Chartered Insurance Institute 2

3 priritising effrts t ensure that infrmatin is effective fr the intended audience and testing cmmunicatins amng real cnsumers. FCA handbk review Mandated disclsure is ne f the regulatry slutins that regulatrs use t address market failures. A key wrk stand related t smarter cnsumer cmmunicatins has been t cnsider the extent t which ur disclsure requirements have been effective at empwering cnsumers t make infrmed decisins abut their finances, and whether changes can be made t certain Handbk disclsure requirements t imprve their effectiveness. The FCA Handbk cntains prduct disclsure requirements fr investment prducts, mrtgages, general insurance, banking and cnsumer credit prducts, amng ther specific areas. The infrmatin required t be disclsed differs depending n the cmplexity f the prduct and risk t cnsumer utcmes. Sme Handbk disclsure requirements stem frm Eurpean Directives r Regulatins, which cnstrain amendments slely in the name f better cmmunicatins. Hwever, there are still pprtunities t imprve disclsure particularly during legislative reviews. The FCA cnsidered whether we can change any f ur nn-eurpean Handbk disclsure prvisins t imprve their effectiveness. We have als reviewed ur Handbk rules t ensure they d nt inhibit effective cmpetitin. Thrugh this wrk and ur discussins with firms and ther regulatrs, we have identified sectins that have nt been as effective as we first envisaged in terms f infrming cnsumers, and therefre we intend t cnsult n their ptential deletin. Name Descriptin Issue The Cnsumer-Friendly Principles and Practices f Financial Management (CFPPFM) The Initial Disclsure Dcument (IDD)/ Cmbined Initial Disclsure Dcument (CIDD) Shrt reprt Custmer disclsure dcument setting ut the firm s apprach t managing and perating its with-prfits business, including its apprach t setting bnus rates and smthing and market value reductins. Guidance in COBS, MCOB and ICOBS suggests that firms can, if they wish, use a template t disclse their services and hw much these cst. Half-yearly, pst-sale disclsure prduced fr investrs in retail authrised funds. Anecdtal evidence and previus reviews suggest that mst cnsumers d nt read the CFPPFM and, if they d, cmplex wrding r superficial explanatins inhibit understanding making the cmmunicatin nt as effective as first envisaged. The template duplicates infrmatin t cnsumers and firms adpt a tick-bx apprach t these disclsures. May nt meet riginal aim f prviding clear and fcused infrmatin abut the fund. Research int smarter cmmunicatins The FCA undertk several strands f research in supprt f this discussin paper: Literature review by Oxera Research: this examined the brad academic literature and presents cases where changes in the disclsure regime have been evaluated and tested: what wrks well and what des nt. Methdlgical tls t evaluate thse changes invlve bth lab and field experiments, as well as ex pst assessments f changes in disclsure rules. The review highlights the main themes f disclsure that apply t mst prducts, including financial services prducts, including design f summary disclsure; engagement f cnsumers, and presentatin f prduct infrmatin. Rundtable discussins with several key stakehlders: this revealed that all industry sectrs have sme awareness and cmmn agreement arund what gd practice might lk like, there is a real willingness t find new ideas and The Chartered Insurance Institute 3

4 slutins, and there appears t be cmmn agreement that cnsumers and firms culd benefit frm making cmmunicatins as effective as pssible. Review f practices in ther cuntries: this invlved pening cnversatins with ther financial services regulatrs in jurisdictins such as Australia, the US, Sweden, Denmark and Nrway. Review f practices in ther sectrs: the FCA als gather examples in ther sectrs thrugh cntact with fr example Ofcm, Ofgem and Ofwat - t understand the practices and develpments in these sectrs. Other research initiatives: the FCA tk in ther activities and initiatives by ther rganisatins including the Eurpean Supervisry Authrities and the Eurpean cnsumer assciatin BEUC. The research identified a number f cmmn behaviurs amng firms r perceived barriers that were limiting the develpment f effective cmmunicatins. These included: firms adpting a risk-averse apprach t cmmunicatin design, by using cnsumer disclsures as a riskmanagement tl t mitigate ptential actin against the firm althugh little evidence was prvided t suggest this had any effect a view that the prescriptive nature f EU and dmestic legislatin leads firms t prduce jargn-filled and lengthy disclsures that firms can d little t imprve again n examples were given f requirements that prevented firms frm cnsidering hw else r additinally t cnvey imprtant infrmatin in a cnsumer-friendly way the view that the csts and peratinal challenges f changing existing cmmunicatins utweighed the benefits firms treating cmmunicatins abut prducts and services as f secndary imprtance cmpared t the design f the prduct r service Opprtunities fr change: specific issues Terms and cnditins Terms and cnditins (T&Cs) typify cnsumers cncerns abut infrmatin cmplexity and verlad. The DP encurages the industry, wrking with relevant stakehlders, t fcus n bringing abut imprvements in this area. Current practice: The FCA industry rundtables revealed a widespread belief that there is little scpe t imprve the accessibility f T&Cs because lengthy cmplex infrmatin is required by regulatin. While it is accepted that T&Cs cnstitute (part f) the legal cntract between the firm and the cnsumer, there are many cases that lk as thugh firms use them t ver-disclse infrmatin in such a way t mitigate risk f cnsumer actin. Other firms als take the view that their bligatins are met when the custmer views (r clicks) their T&Cs. Research by BEUC als fund that many prvisins in T&Cs are clearly meant fr third parties, such as the cnsumer s lawyer relevant primarily in case f cnflict. Scpe fr imprvement: cntent: the inclusin f the cre minimum infrmatin that legally must be cmmunicated t the cnsumer in the cntractual 'terms & cnditins'. Other gd practices include nly including infrmatin abut legislatin and regulatin where actually necessary r relevant, rather than as a 'just in case' cmpliance measure. In ne example we have seen, a firm reviewed their T&Cs t ensure it included nly the essential infrmatin and presented this in a way their target audience culd understand and engage. The Chartered Insurance Institute 4

5 design and delivery: firms culd explre additinal r alternative mechanisms fr highlighting the mst critical infrmatin fr the cnsumer that might better: alert them t their rights and respnsibilities, enable them t take int accunt materially imprtant infrmatin, r imprve their ability t avid r minimise pr utcmes. Fees and charges Oxera s review fund that cnsumers are best able t assess the quality f a prduct r service and whether it meets their needs when they are fully infrmed abut its key benefits and features. The mst imprtant infrmatin fr cnsumers t be aware f is the price r charges assciated with the prduct r service. Current practice: requiring firms t disclse price infrmatin clearly, at an apprpriate time and thrugh a suitable medium helps minimise present bias (when cnsumers ignre csts that are nt in the here and nw) and therefre help inattentive cnsumers, accrding t research by the FCA. in the general insurance sectr, it is nt clear whether the existing apprach t prviding ttal fee infrmatin (including additinal csts t make mid-term administrative changes) effectively addresses ther bias such as vercnfidence, empwers cnsumers t fully cnsider the impact f aspects n the ttal cst f their insurance, hence there is little pressure n the level f fees insurers charge t make administrative changes t a plicy. in the mrtgage market, Which? highlighted cncerns that a cnsumer s ability t cmpare prducts and t understand all assciated csts is made particularly difficult by the significant number f additinal fees that a cnsumer can incur. Scpe fr imprvement: There are a number f regulatry initiatives aimed at addressing, r seeking t address, cst transparency. This includes initiatives in the investment, cnsumer credit and mrtgage markets. But there is mre the sectr can d t help cnsumers: appreciate the ttal csts they culd incur; d nt ignre ptential additinal charges that culd apply t a financial prduct; cnsider all the relevant factrs when shpping arund Depending n the nature f the market and the csts, there are a number f ptential ways t help present clearly the full csts assciated with a prduct r service in the infrmatin given t cnsumers. These include: (re)infrming the cnsumer clearly at the pint at which it becmes apparent that an additinal charge may be incurred, and nt exclusively at the pint f sale; quantifying r expressing in mnetary terms where limits r caps apply; fr lng life-cycle prducts including a generic timeline with payment pints nted against the varius stages might be a simple and easy way t present the csts cnsumers are expected t pay and at what pint; and including the cumulative impact f the charges n the value f the cnsumer s investment in the lnger-term. FOS/FSCS There is mre the industry can d t help cnsumers t identify wh is the mst apprpriate persn t speak t when they have a cmment r query abut a prduct r service that is nt perating in line with their expectatins, hw t escalate this t the Financial Ombudsman Service (FOS), and where a prduct r service is ptentially cvered by the Financial Services Cmpensatin Scheme (FSCS). Current practice: The FOS currently receives enquiries frm cnsumers wh are nt lking t have a cmplaint investigated, but are trying t identify what t d when they have a cmment r query abut a prduct r service that is nt perating in line with their expectatins. The Chartered Insurance Institute 5

6 Typically, what matters t the cnsumer is the quick and effective reslutin f an issue. In many cases, the mst apprpriate and efficient reslutin culd be delivered early by direct cntact with the firm itself, ften by frntline staff. Many cmplaints are caused by misunderstandings that the business culd quickly put right if the matter was brught t their attentin. Mst cnsumers seeking depsit recvery frm the banking financial failures in 2008/9 were unaware f the existence f the FSCS. As a result, the Tripartite authrities and FSCS sught t address this via detailed disclsure rules, an FSCS cnsumer cmmunicatin campaign, and PRA rules requiring the use f stickers and psters in branches, and the prvisin f key infrmatin and signpsts n websites General insurance cmmn terminlgy The regulatr has identified a number f issues in the general insurance market that can ptentially be addressed thrugh effective cnsumer infrmatin. Current practice The FCA s thematic wrk highlighted a number f disclsure-related challenges, These include cncerns that infrmatin prvided t cnsumers ften did nt help them make an infrmed decisin. A number f shrtcmings were identified where infrmatin culd be insufficient, incmplete, prvided at the wrng time r presented in a ptentially misleading way. Cnsumers ften had pr understanding f prducts: they made significant mistakes when asked questins abut cver. Althugh many participants indicated they were happy with the infrmatin given, these were participants wh had never had t make a claim; n review, they were surprised by their plicies. Husehld and travel insurance custmers wh had their claims rejected were less likely t have understd r read their plicy dcuments cmpared t thse wh had their claims paid ut. Cnsumers find it difficult t cmpare prducts and the different elements f cver. Cnsumers were very driven by price, but ften did nt understand that different prices might reflect different levels f cver, instead assuming higher prices meant a firm was just charging mre and making mre prfit. Cnsumers fund language cnfusing, thugh the general insurance add-ns market study qualitative cnsumer research als highlighted that language that appeared clear culd give rise t a false sense f security, if accepted at face-value withut clse scrutiny f clauses in dcumentatin that might, shuld ccasin arise, cause prblems subsequently. Scpe fr imprvement Fr a cnsumer wh assumes there is n difference in cver, r des nt engage fully with the prduct sales infrmatin, the risk f purchasing smething nt apprpriate fr their needs, and therefre pening the expectatins gap is significant. Cre persnal lines general insurance, such as mtr r hme insurance, is heavily price-fcused with firms keen t appear at the tp f cmparisn tables. Hwever, we are cncerned that this frm f cmpetitin in the general insurance market des nt necessarily wrk in the best interests f cnsumers if it is nt supprted by infrmatin that facilitates cnsideratin f cver and quality. Our discussin paper DP15/4 explres ptins fr intrducing a market wide transparency measure t encurage cmpetitin n aspects ther than price, such as prduct value. The FCA are interested in ideas fr hw firms culd prvide better explanatins f key features, benefits and exclusins, which are accessible t cnsumers when they are making decisins. There are different ways f achieving this aim. One is t define single, cnsistent meanings fr features such as curtesy car, meaning that cnsumers can have a clear idea that when a plicy states it has such a feature, that it The Chartered Insurance Institute 6

7 will mean the same thing. Alternatively, r in additin, firms culd demnstrate clearly t cnsumers where their cver differs frm the agreed definitin Cmplexity at retirement Cnsumer inertia and lack f engagement are particularly prevalent when it cmes t retirement planning and saving. Until recent changes in the pensins landscape, chices made at retirement were typically irreversible. The need fr cnsumers t engage has never been mre acute. The pensin refrms place mre respnsibility n individuals t make decisins abut their pensins savings at retirement. They als intrduce a hst f new terminlgy in a market where cmplexity already deters sme cnsumers frm engaging. Further prgress is needed t imprve the language used by the industry when it cmmunicates with cnsumers. In FCA industry rundtables, sme firms representing the life, pensins and insurance sectrs acknwledged there was a lack f cnsistency in terminlgy that made it difficult fr cnsumers t understand and cmpare prducts and their features. The regulatr welcmes and supprts industry effrts t reduce jargn and t cmmunicate with custmers in a language they can understand. Drawing n the cmbined experience f their distinct custmer bases, these rganisatins culd fr example: establish the mst cmmn features and technical terms directly linked t the pensin and the perfrmance f the investment that cnsumers need t understand and, just as imprtantly, thse that are mst cmmnly misunderstd agree a single cnsistent explanatin fr each that is a mre fitting and relevant descriptin f what it is, what it des, what it means fr the cnsumer wrk by the Natinal Emplyment Savings Trust (NEST) develped eight Glden Rules fr talking abut pensins in the cntext f the wrkplace pensin refrms and autmatic enrlment, culd prvide a starting pint. NEST Glden Rules fr Pensins Cmmunicatins Keep it real: Use examples peple can relate t and avid abstract cncepts. Rights nt respnsibility: Tell peple what they're entitled t nt what they shuld be ding. Out with the ld: Make pensins relevant t their lives nw and dn t fcus n the details f retirement. One fr all: Make it clear autmatic enrlment is happening t mst wrkers, nt just them. Tell it like it is: Present the facts and avid 'spin'- peple want t make up their wn minds. Give peple cntrl (even if they dn't use it): Tell peple abut their chices and nt that everything's dne fr them. Take peple as yu find them: Give peple access t infrmatin that matches their knwledge and interest. Be cnstructive: Tell peple abut slutins, nt prblems r scare-stries. Investment advice There is an pprtunity t imprve the infrmatin cnsumers receive abut the scpe and cst f investment advice services t enable them t chse an advice service which best meets their needs and budget. The Retail Distributin Review (RDR), which was implemented n 31 December 2012, was a nce-in-a-generatin change t make retail investment markets wrk better fr cnsumers. Since implementatin, the regulatr has assessed whether the refrms are delivering the intended utcmes. Early findings were very cncerning, with a large number f firms failing t prvide their custmers with the apprpriate infrmatin abut the scpe f advice ffered and the cst f that advice. One slutin identified was the use f labels, such as the US Envirnment Prtectin Agency s fuel efficiency label. The Chartered Insurance Institute 7

8 the FCA cnsider that a variatin f this label culd be used by investment advisers t help cnsumers understand whether the advice is independent r nt, and the cst f this advice. whether the investment advice a firm ffers is independent r restricted and what this means in practice (MiFID II, due t take effect frm January 2017, will require firms t infrm the client whether investment advice is prvided n an independent basis r nt); as utlined in the RDR pst-implementatin review, the FCA s Smaller Business Practitiner Panel is currently lking at develping prpsals fr a simple label as indicated belw. Next steps The Discussin Paper clses n 25 September, and a feedback statement will be published later this year. The FCA will als use the respnses t this paper, where relevant, t infrm nging interactins with the EU and dmestic regulatrs n disclsure issues. wrk with firms t test new ideas. The results f this testing, if effective, culd infrm the regulatry apprach, lead t cnsultatin n rulebk changes and culd als influence ur negtiating strategy when Eurpean directives are (re)negtiated. cnsult later in the year n prpsed changes t sme f the Handbk disclsure prvisins in this paper. CII Plicy & Public Affairs August 2015 The Chartered Insurance Institute 8