SPECIAL FEATURE: The FCA and innovation

Sarah Davidson

July 6, 2015

The FCA says the aim is to encourage and inspire – yes, you read that right, inspire – firms to think differently about how they communicate with consumers. And what they mean by that isn’t at the advertising or promotions end of the spectrum, but all the way through the relationship with the customer.

The FCA’s current appetite for innovation

This is the second initiative about communications and innovation to emerge from the FCA recently – we had already seen the FCA through its innovation hub calling for input on how to reduce any barriers to innovation in digital services.

This time, the FCA lays bare the dilemma that it recognises firms face when it comes to setting out consumer information on product information, disclosure, and terms and conditions.

The dilemma for firms

To paraphrase the FSA’s thinking in the discussion paper about the views of firms:

On the one hand, firms rightly prioritise the need to ensure compliance. But the problem is that this can end up resulting in a risk-averse, legalese-driven approach that means every i is dotted and every t crossed, but not necessarily in ways that the average consumer can be bothered to read, let alone understand.

On the other hand, adopting a punchier, friendlier, more helpful approach neither benefits the organisation commercially in the short term (where’s the win in going to significant discretionary cost and effort when the status quo is the industry norm and no-one reads it anyway?), nor is it risk-free.

As the FCA acknowledges “some firms indicated that these problems are symptoms of a ‘tick-box’ approach to communication that is driven by uncertainty about our expectations and fear of action being taken against them”.

What’s the alternative?

Recognising this dilemma, what’s the regulator offering as an alternative approach?

Lots, in fact.

The FCA gives credit where it’s due, noting the good practices that it saw emerging in some firms.

Having looked at what some firms are doing, the FCA says good practice included:

• genuinely well-targeted communications to the needs of a target market;

• key information delivered concisely using plain language, bullet points and clear graphics;

• information provided at a time consumers need it and in an engaging format; and

• interactive communications using technology to make information more accessible to consumers through mobile devices, apps, social media, YouTube, online tools and portals.

• Show the FCA what good looks like

Without going as far as endorsing them, the FCA gives plenty of real-life examples, from firms you will know, of innovative communication that you can watch online – such as videos, graphics, cartoons, and tabulated information.

The FCA specifically asks firms to provide information about any elements of the handbook or the disclosure requirements that they think specifically inhibit their ability to provide consumer-friendly communications – with a promise to address these if they can.

And, perhaps most creatively, there is an invitation:

“We are keen to start engaging immediately with regulated firms, new innovator businesses or other interested parties to find ways to make consumer communications as effective as possible. We strongly encourage firms with ideas for smarter ways to communicate with consumers, to volunteer to involve us in testing their proposals and to share the results with us.

“We will look to work with a selection of firms that submit particularly innovative customer-focused ideas with a strong potential for improved consumer outcomes. Where an idea has strong potential for consumer outcomes to be improved, we may consider waiving or modifying certain disclosure rules, if appropriate, to facilitate this testing. If the tests are successful, we may also look at how we can use the results more broadly; such as providing a strong evidence base to inform and influence our negotiating strategy when certain EU directives are (re)negotiated or lead to changes in our rules.

“Interested firms should complete a short online form to signal their interest.”

Sounds great – where’s the rub?

As a communicator myself, my personal perspective is that this initiative contains a lot of common sense, and some great opportunities for creative firms to engage with a regulator that really does seem receptive to the potential merits of “doing things differently”.

It is inspiring. Heavens, the regulator is even offering to consider waiving or modifying disclosure rules to help firms test innovative customer-focused ideas that it agrees have a strong potential for improved consumer outcomes. That’s not something you hear every day!

But – and I hate to be the one to present a “but”, as I am a big fan of the vision and the approach – the FCA does need to recognise that it’s a really tough call for firms to be sure whether the information they give consumers now will at some point in the future satisfy not only the FCA, but also the Financial Ombudsman Service, and ultimately the courts.

Concise and intelligible information may be consumer-friendly, it may even be FCA compliance-friendly, but the extra challenge is to ensure that it is also fully legal-friendly and complete, and needs to remain so into the future – reassurance that that what is “good now” will also be “good then” is important. Of course it’s not impossible, but the fact that firms will be considering these influential wider factors, as well as simply the FCA, doesn’t seem to get a mention. Is there anything the regulator could do to square this circle, I wonder?

As someone sitting at the centre of an industry where I can see just how hard mortgage lenders are already working to deliver an enormous list of essential changes driven by absolute, non-discretionary requirements of regulation, and seeing how resource-intensive that is, I also understand why giving this initiative an optimum level of resource may struggle to compete for space in lenders’ already crowded worklists.

And – whisper it quietly – there’s also the possibility that as a large organisation with multiple strands, the FCA’s own culture may not yet be entirely aligned to the message – we still sometimes hear some lenders telling us that their supervisors have a tendency to adopt a “tick the box first, think creatively second” approach.

Don’t bring me problems, bring me solutions

Image of light bulbs – innovationNevertheless, the discussion paper’s suggestion of “writing for the consumer first and then ensuring communications are compliant, rather than the other way round” is a great challenge to the financial services industry, and one that lenders are already rising to.

The CML/Which? voluntary initiative to improve information and understanding on mortgage fees and charges may only be one step, but it’s one that is going in the right direction. This is going to end up making it far easier for consumers to compare and understand different lenders’ mortgage tariffs, as well as making it easier to get a clearer picture of what they will have to pay and when. Lenders have chosen to do this – because it makes sense.

No excuses?

More subtly, let’s also recognise that the regulator is extending an iron hand in a velvet glove. The subtext is very much that engaging with this issue isn’t optional.

Having worked with firms to identify common behaviours or perceived barriers to effective communication, the FCA notes that these included (in the regulator’s words):

• Firms adopting a risk-averse approach to communication design, by using consumer disclosures as a risk-management tool to mitigate potential action against the firm – although little evidence was provided to suggest this had any effect

• A view that the prescriptive nature of EU and domestic legislation leads firms to produce jargon-filled and lengthy disclosures that firms can do little to improve – again no examples were given of requirements that prevented firms from considering how else or additionally to convey important information in a consumer-friendly way

• The view that the costs and operational challenges of changing existing communications outweighed the benefits

• Firms treating communications about products and services as of secondary importance compared to the design of the product of service.

In response, it comments: “We do not consider these perceived barriers sufficient reason that firms should not give greater priority to developing effective consumer communications and believe firms should both challenge these behaviours in their organisations and that we as a regulator should support this.

At the CML, we’re longstanding advocates of good customer communication, “layered” in the way the FCA suggests. If you hark back to the days before mortgage regulation, the CML’s brief “You and your mortgage” summary leaflet that was given to all customers (but signposted them to further information about their protections under a voluntary code) would probably look a bit like something the FCA might like even today!

Squaring legal compliance with consumer-friendly communication isn’t easy – perhaps not as easy as the FCA implies – and the FCA isn’t the only outfit firms need to satisfy. But great communication is a prize worth aiming for, especially given the irony that consumers are the very reason why the rules and compliance exist in the first place.

My colleagues in the CML policy team will be working with members and responding to the FCA discussion paper by the 25 September deadline.

In the meantime, what do you think? Thoughts on a postcard (or if you want to enter into the spirit of this, a tweet to @cmlpressoffice or a comment on the CML’s LinkedIn page!) are very welcome.

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