By Martyn Oughton
Votes on major subjects around the
world have garnered so much press attention during the last year, it made me
think about how to tackle a particular subject that has been gathering pace
with the Financial Conduct Authority (FCA) over the last few months. It is the
subject of making communications with policyholders better, an initiative the
FCA refers to as “Smarter Communications”.
that the regulator is about to hold a big poll – to ask authorised individuals
and firms about how effective this initiative has been so far, and is likely to
be in the future. The way in which firms and individuals vote will affect the
future direction of travel that this initiative will take. Please note, before
we go any further, that this is an entirely theoretical scenario.
The question you will be asked to vote on is as follows. It requires a
simple yes or no answer.
“Do you think that
the FCA’s Smarter Communications Initiative will meaningfully improve
communications whilst reducing unnecessary regulatory barriers?”
The reason for proposing a poll in this article is simple – there are
cases for both sides of the vote which have merits and demerits. Whilst my
particular view will come out in this piece, there is a corresponding
contra-argument which deserves to be heard, rather than focusing on one
particular point of view.
So read on, listen to both sides
of the argument and think – how will you vote? Yes or no?
This initiative, as the FCA
calls it, started its journey back in June 2015 with the publication of a
setting out a case that the way in which firms communicate with customers needs
to be rethought. This follows on from the work the regulator previously carried
out, using behavioural economics to illustrate that consumers often respond in
an asymmetrical way to information that they are presented with when asked to
make financial decisions. The FCA wanted to put smart communications front and
centre in terms of the way that firms interact with their customers.
But this innocent looking Discussion Paper came with a sting in the
tail. You only have to look at the foreword to see that the FCA has already
decided firms are not doing enough to communicate with their customers in an
effective way – citing various thematic reviews and market studies as well as
research it has commissioned. Is this regulation by the back door? That is
probably a discussion for another article. But firms were immediately made aware
that an atmosphere of open debate and discussion would be hanging thick with the
weight of regulatory expectation.
But enough of that – we
need to look at the initiative itself and how it has developed.
So what of this initiative?
Well, to be fair, it looked like quite a revolutionary thing for a regulator to
come out with. Not only did it first of all pinpoint some specific examples of
good practice and effective communications but it also suggested that, brace
yourselves, certain regulatory documents were potentially no longer necessary!
And it does not stop there. The FCA also suggested that there are some big
issues in the industry that needed to be tackled head on, such as how best to
present product terms and conditions, how fees and charges can be disclosed and
even the recurring issue of how best to present information to those approaching
This all felt like fairly radical stuff, but
when you read the follow-up Feedback
Statement which was issued in October 2016, the tone appeared to have
changed a little. Whilst the FCA was still committed to the initiative, it had
considered some of the responses received to the initial Discussion Paper, but
the responses felt a little muted in places.
the need to encourage digital communications in various forms is something that
the FCA is keen to emphasise but it merely responded by saying that it has not
tested any of the proposed methods, encouraging firms to consider how they can
best engage with their customers. Hardly breaking news from a regulator which
had previously said this was mandatory.
But despite the
initial enthusiasm being tempered a little from the original Discussion Paper –
which did in places feel like something of a blue sky document – the direction
of travel still appears to be largely intact. So now it is time to get into the
nitty gritty – the cases for the “yes” and “no” votes.
The case in favour of this particular
initiative can be built from quite a strong base, and on two fundamental
premises – the financial services industry is just not very good at
communicating with its customers, and needs to stop hiding behind complex
contract terms presented in ways in which customers cannot understand. This
enables firms to bamboozle customers with lots of hidden charges and terms
which allow them to charge more than expected.
some would go so far as to say that this industry has been lagging behind others
in its standards of communications for quite some time now, and is producing
communications that would struggle to pass today’s compliance tests.
And if that is not enough for you, just look at the array of findings that the
FCA has come out with recently with regard to communications from its various
The themed review into the treatment of existing
life insurance customers has resulted in Finalised
Guidance based around achieving a series of consumer outcomes. One of
these outcomes – number two – deals with the subject of communications,
requiring that firms put more of an emphasis on making sure that communications
are clear and timely, allowing consumers to make informed decisions.
The FCA also found shortcomings in communications in its Retirement
Income Market Study
back in 2015, particularly concerning the issue of shopping around for an
annuity. The FCA has tried many times to get firms to step up to the mark in
terms of the amount and clarity of information provided on this subject. But has
it worked? Apparently not. Which is why the regulator is now consulting
separately on requiring firms to provide specific information prompts at the
point the annuity is being proposed, to really emphasise the value of buying an
annuity on the open market.
And these are not new problems
either. Back in 2007, the FCA’s predecessor, the FSA, carried out a study of
firms’ key features documents and found only about 15 per cent of those sampled
met the standards required by rules and principles at the time.
Add to this the fact that insurance firms are still writing
ridiculously long sentences into policy terms and conditions
then the whole thing is obviously a complete mess. It has been for years, and
only a direct intervention by the regulator is going to make any difference for
the better in future. Case closed.
The initial Discussion Paper was clearly drafted with high hopes for a
full discussion and debate which would generate a significant amount of value in
terms of engagement from both within and outside of the industry. Rather than
try and cajole firms into taking action, the intention was clearly to try and
encourage innovation and fresh thinking, embracing new technology in the
process. Oh, and if there were any pesky rules getting in the way, the FCA would
just get rid of them. What could possibly go wrong?
answer to this question actually lies partly in the original Discussion Paper.
In the very first chapter, the first thing the FCA does is provide examples that
firms are taking this matter forward on their own. Examples of practice that the
FCA sees as already very good are shown in all their glory, including video
series, cartoons and mobile apps. For those who hold the belief that firms are
just not interested in embracing new communications ideas, this point is
disproved at the very beginning. Some of the firms whose examples are quoted are
significant-sized players too – so this is not just an issue that the smaller,
more agile firms are embracing.
The assertion that
regulatory barriers can be removed is also tempered right from the start – by a
little thing called EU legislation. To quote the FCA itself, “Where the EU has
legislated on product disclosure, our ability to make or amend our Handbook
will be constrained by that legislation”. And before you say that actually this
point is overplayed, jump across to the Feedback Statement and go to Annex 2
where the FCA provides feedback on issues raised in respect of specific
disclosure rules. Cast your eye down this list and see how many responses say
that the regulator is constrained by one piece of EU legislation or another. It
is quite a few. And before you shout, “Brexit”, remember that even if that
particular scenario pans out as quickly and as cleanly as some would like it
to, this particular regulatory situation is not likely to change for some
Then you have to look at other aspects of the
direction of travel since the discussion started; starting with policy terms and
conditions. No more 200-word sentences? Not quite.
started by saying that terms and conditions are the ultimate example of
information overload and customers do not engage with them. So what is to be
done? Sweeping new rules? A major review ordered against the worst offenders? No
– a round table discussion.
This has been partly brought
about by some of the feedback the FCA received which actually stated some
obvious points that have been known for some time now. Terms and conditions are
essential parts of contracts and both firms and consumers are entitled to rely
on their detailed provisions. So now, we have a general call from the FCA to
improve the clarity of terms and conditions. By issuing summaries of the key
terms perhaps? Yes, except some firms, particularly in the general insurance
sector, are already doing that – so this is not really anything new
OK, forget terms and conditions – what about
something simpler? What about putting a simple logo on documents promoting the
fact that products are covered by the Financial Services Compensation Scheme?
No, that will not work either. The problem is that where compensation is only
payable in specific circumstances, a simple logo could mislead consumers into
thinking they have more protection than they actually do.
All of this original ideological thinking looks like it is being
brought right down to earth, and the feedback has only served to take the wind
out of its sails. So the vote should obviously be “no”.
No piece looking at
an issue like this would be complete without the editorial view on which way you
should cast your vote. It may not come as a surprise to hear that the verdict is
you should vote “no”.
You may have noticed that the case
for the “no” vote is longer than that for the “yes” vote. But this is not
because of bias – it is because the evidence that the initiative appears to be
moving away from what it originally set out to achieve appears to be greater
than the evidence to show that this will deliver real results.
However, the joys of democracy are such that you can vote exactly as
you wish – and not listen to what I say!
Just one last
thing, though. It is not all doom and gloom. We must not forget that when it
comes to some regulatory documents, the FCA has already taken the bull by the
horns and has said they are no longer required. So, for example, if you are an
insurer running with-profits funds, the regulator has not waited for the
discussion to kick off – it has grasped the nettle and proposed that the
Consumer-Friendly Principles and Practices of Financial Management document no
longer served any useful purpose and should go.
And lo and behold, it has. Firms can now decide whether or not to keep issuing
it, change its format or produce something completely different – the regulatory
constraints are no longer there.
How about that for a
proactive approach? Why can the FCA not try this approach more widely? Give the
industry a set of scenarios where regulations are already eased and let the
industry formulate its own solutions. Open the debate instead of closing it
Now that is something that would get my
author: Martyn Oughton is a financial services
professional with over 20 years’ experience in the industry. He has been a
compliance professional since 2007. In 2009, he became a Professional Member of
the International Compliance Association (ICA), and has recently been an
examiner for the ICA, marking exam papers and assignments for their UK and
International Compliance, Anti-Money Laundering and Financial Crime Diplomas. A
regular contributor to Wolters Kluwer Financial Services’ Compliance Resource
Network, he also regularly writes for the ICA’s members’ journal “inCompliance”,
and is also a freelance business-to-business copywriter and article