The rules and principles which apply
The Consumer Duty understanding outcome requires products and services to be designed to meet the needs of identified consumer groups and be targeted accordingly. This impacts the way in which intermediaries market products to customers and prospective customers.
In general, the FCA would expect firms to market to their customer base taking into account the likely knowledge and experience of the market which they are targeting. Typically, firms should be able to demonstrate how they target promotions to make sure these are aimed at the right customers.
PERG 8.1.7A.2 states that an insurance intermediary will be communicating a financial promotion if they are inviting or inducing persons to enter into a contract of insurance.
ICOBS 2.2 contains specific rules regarding the communication of financial promotions to clients requiring firms to ensure that financial promotions are clear, fair and not misleading and always clearly identifiable as marketing communications.
How this may affect you
Firms should consider in the first instance the target markets with which they deal and take this into account when drawing up financial promotions. Firms should specifically consider any potential characteristics of vulnerability within the target market. For example, the FCA might reasonably expect firms aiming marketing at young drivers to bear in mind that such customers may not previously have purchased motor insurance. Communications aimed at this group should therefore not assume any understanding of even the most basic concepts such as Third-Party Fire and Theft, excesses, no claims bonuses etc., or the fact that a low value vehicle may not be appropriate for comprehensive cover. It is also likely that younger consumers may not have had significant experience of financial concepts in general.
Designing the financial promotion
The promotion (including the way in which it is presented) should be clear, fair and not misleading. Promotions which do not meet this standard can pose a risk as they could lead to consumers buying a product that does not appropriately meet their needs. To ensure financial promotions are clear, fair and not misleading firm should:
- clearly highlight any risk warnings;
- ensure that any claims made within the promotion are fair and that the firm can substantiate these;
- draw the customers attention to any costs associated;
- ensure that the channel used to communicate the financial promotion is appropriate for the target market, and can be sufficiently controlled (for example, when issuing a promotion via social media the firm should consider how this will manage responses and sharing of the financial promotion, e.g., ‘re-tweets’ – the FCA has previously published guidance which should be considered where social media is used to market product, and at the time of updating this page was considering responses to a Guidance Consultation on financial promotions in social media);
- ensure that the presentation of the promotion is clear regardless of the channel that is used to communicate the promotion (for example, if a firm uses a channel which limits the amount of text that can be used it should consider how it provides further information); and
- use plain and simple language and avoid jargon or complex legal terms that the majority of consumers would not clearly understand.
We recommend that, when designing promotions, you take into consideration our compliance manual guidance in Section: H.4.6.1 Effective and Tailored Communications.
Where a financial promotion indicates or implies that a firm can provide reduced premiums, the cheapest premium or reduce a customers costs the firm should ensure that the financial promotion is consistent with the result reasonably expected to be achieved by the majority of customers who are likely to respond. If the pricing claim is only expected to apply to a proportion of the target market this must be prominently stated. i.e., ‘we are able to offer reduced premiums for 70% of customers.’
The financial promotion must also state prominently the basis for any claimed benefits and limitations.
It should also comply with other relevant legislation including:
The Unfair Terms in Consumer Contracts provisions within the Consumer Rights Act 2015
Staff trained to deal with responses
Where a particular marketing promotion is undertaken, the firm should ensure that staff are adequately trained to deal with the responses, especially where the promotion is directed at a target market or advertises a product which is new to the firm. This should involve how to approach and deal with customers with characteristics of vulnerability. More information on customer vulnerability can be found in Section B.19 of this manual.
Firms should maintain a Financial Promotions Register. The Register should list all promotions (including websites), record their formal approval and include a date by which the promotion should next be reviewed. To record an approval, it is first necessary to have an appropriate approval process.
Essentially, Principle 12 (Act to deliver good outcomes for retail customers) together with the detailed requirements of the consumer understanding outcome, encapsulates the concept of fair treatment. Firms should, as part of their financial promotions approval process, specifically check that financial promotions are designed to deliver fair outcomes for customers and, particularly, for the audience at whom the promotion is directed.
Firms should ensure that that approval process is not just carried out through a compliance or legal lens but include those who are trained to champion good customer communications.
Firms may also decide to have a checklist for Financial Promotions which covers specific issues such as no small print, no inappropriate emphasis, no unfair claims, no use of jargon, etc.
Feedback on promotions
Firms should monitor customer feedback and complaints data, and where they become aware that a financial promotion has been insufficiently clear or incorrectly targeted, the promotion should be immediately withdrawn, or appropriate amendments made. In addition, the firm should consider whether any customer detriment has been caused by the promotion and if so, should take measures to address this.
Third party marketing material
Where marketing material is provided by a third party (such as an insurance provider or an outsource marketing company), we recommend that the firm applies the same levels of review and approval as it would to the firm’s own promotions. Where the firm identifies any issues, such as inappropriate targeting, unclear wording, etc, these should be fed back to the third party concerned.
Terms of Business
The firm’s Terms of Business should also be subject to regular review to ensure that it properly reflects the basis on which the firm conducts its business and that it meets the consumer understanding requirements in terms of being clear, fair and not misleading; we currently recommend six-monthly reviews.
In addition, given the FCA’s increased focus on fairness in consumer contracts and appropriate outcomes for retail customers, we recommend that any other standard agreements between the firm and consumers are subject to the same periodic review and that all such contracts are also reviewed at any time a consumer complaint indicates actual or potential misunderstanding of such terms.
The FCA published a set of FAQs some time ago which relate to the issue of fairness in consumer contracts. The FAQ in particular list the following as examples of good practice by firms in terms of ensuring that contracts are fairly drafted:
- Regularly reviewing standard form consumer contracts for fairness to ensure they comply with the regulations*
- Reviewing contracts when complaints and cancellations are made or where there is evidence that terms may be unfair.
- Reviewing all appropriate undertakings obtained by the Regulator and the Office of Fair Trading (OFT) (as shown on their websites)
- Reviewing other information from the Regulator on unfair terms, e.g., thematic work, speeches and updates (click here for a link to the relevant FCA pages)
- Monitoring alerts and industry guidance from trade bodies
- Improving staff training to ensure staff meet the standards set out in product literature, including contracts
*In our view this would specifically include the Unfair Terms in Consumer Contracts provisions of the Consumer Rights Act 2015 as well as the principle of acting to deliver good outcomes for retail customers.
Firms may also wish to consider how they communicate their terms of business in terms of layout, presentation and language to make it as clear and easy as possible for customers to understand.
We also recommend that, in the spirit of fair treatment, where significant changes are made to a firm’s Terms of Business or other consumer contract, consideration should be given to how this is communicated to customers. For example, if at renewal, a firm increases its fees for amendments or cancellations, it may be appropriate for this to be specifically brought to a customer’s attention rather than simply issuing an updated version of the Terms.