This article provides key insights from a recent webinar on the topic by Dr Mimi Zou, Frank Brown and Professor Iris Chiu. The webinar can be viewed on Youtube: https://lnkd.in/eGsyWgqp.

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The introduction of the Consumer Duty in the UK has placed consumer protection at the forefront of the financial services sector. Financial promotions have been a central concern for the FCA. According to the FCA Handbook, “financial promotion” refers to an invitation or inducement to engage in investment activity or to engage in claims management activity that is communicated in the course of business, having an effect in the UK. The FCA has always emphasised the importance of the fair, clear and not misleading rule. A flurry of regulatory changes and policy announcements over the past year highlight the FCA's tougher stance on the need to protect consumers from illegal, misleading or unfair financial marketing.

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Recent changes in financial promotions landscape

The FCA has become increasingly active in monitoring financial promotions. During the third quarter of 2023, 75% of the FCA's review of financial promotions was a result of their proactive monitoring. This represented a substantial increase compared to Q2 of 2023 where only 15% came from the FCA's own monitoring. In total, the FCA reviewed 1,211 financial promotions in Q3 of 2023. As a result of their scrutiny, 5,310 promotions were either amended or withdrawn (a threefold increase in amendments or withdrawals compared to Q2). The timing of increased monitoring in financial promotions seems to coincide with the launch of the Consumer Duty on 31 July 2023, suggesting financial promotions are likely to be an important area of regulatory oversight in the Consumer Duty era.

The FCA's recent regulatory reach in financial promotions has extended beyond traditional boundaries in certain cases. For example, new rules on cryptoassets now require firms (regardless of location) seeking to promote cryptoassets in the UK to retail consumers must be authorised or registered with the FCA or have their marketing/promotions approved by an authorised firm. Beyond ensuring the promotions are clear, fair and not misleading, certain requirements must also be met, such as labelling promotions with prominent risk warnings and not inappropriately incentivising people to invest. The FCA has also communicated its strong   expectations regarding the need to comply with financial promotions rules for the Buy Now Pay Later (BNPL) sector, which is anticipated to come within the FCA’s regulatory perimeter. The FCA has further introduced a financial promotions gateway, requiring authorised persons who approve financial promotions for unauthorised entities must apply for permission from the FCA to do so.

The UK Financial Conduct Authority (FCA) has further released updated draft guidance on social media financial promotions, addressing the growing presence of financial influencers or "finfluencers" on social media platforms. The FCA aims to ensure clear expectations for financial promotions on social media and reflect the evolving landscape. The draft guidance clarifies the application of "required information" on different social media platforms and suggests risk mitigation techniques for UK consumers interacting with non-UK entities. The FCA's expectations for firms communicating financial promotions on social media are raised in line with the Consumer Duty and the requirement to deliver good outcomes for retail customers. The guidance also addresses the potential harm caused by influencers promoting approved or illegal financial promotions. Firms are reminded to have proper systems and controls in place, ensure clear risk warnings, and consider the appropriate use of social media channels for promotion. Compliance with social media platforms' advertising policies and the Online Safety Bill is also emphasised. The consultation period for the draft guidance closed in September 2023, with final guidance expected later this year.

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Factors driving such change

The changes in financial promotions and the introduction of the Consumer Duty by the FCA are driven by various factors. One key driver is the surge in high-risk investments made by retail customers, which has been further amplified during the COVID-19 pandemic. There have been concerns regarding a lack of understanding among consumers regarding the nature and extent of risks associated with a range of high-risk financial products.

Additionally, the  FCA has observed in its Consumer Duty Consultation Paper (May 2021) that online sales journeys often exploit consumers' behavioural biases, leading them to make ill-advised investment decisions. These promotions tend to highlight the benefits and options of credit, while downplaying or making less accessible alternatives for consumers. Furthermore, there is a misconception among consumers that certain high-risk products, such as crypto assets, are directly regulated by the FCA when they are not.

These factors have been repeatedly emphasised by the FCA in recent policy announcements, motivating the changes seen in this area. The FCA's focus remains primarily on consumer protection. Its preemptive approach to consumer protection is evident in the Consumer Duty. The aim is to prevent harm before it occurs, rather than constantly playing catch-up with emerging products and services.

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Implementing the Consumer Duty

The Consumer Duty has presented various implementation challenges for organisations. While the FCA has issued guidelines and final guidance, ambiguities and gaps in the regulatory framework persist. Firms find themselves cautiously navigating these uncertainties, with some high-profile cases already highlighting the consequences of inadequate implementation.

It is crucial for firms to approach implementation of the Duty by considering the overarching principles and cross-cutting rules that the FCA has emphasised. The FCA has established three overarching principles for firms, which are as follows: (1) Demonstrate good faith when dealing with retail customers; (2) Implement appropriate measures to prevent foreseeable harm to retail customers; and (3) Adopt reasonable measures to empower and assist retail customers in achieving their financial goals.

As firms navigate the interconnectedness of the outcomes under the Duty, a key aspect is the interrelationship between communication and product governance outcomes. Firms must ensure that their communications not only facilitate understanding but also align with the suitability of their products for the target market. Firms should therefore thoroughly examine their product life cycle processes. This entails scrutinising everything from product design to distribution, as a poor governance or distribution process can ultimately lead to subpar communications and negative consumer outcomes.

The FCA expects firms to demonstrate outcomes throughout the entire product journey. The need for firms to undertake a comprehensive evaluation of their practices is particularly emphasised, requiring them to re-scrutinise their strategies and make necessary adjustments. Firms will need to provide evidence to the FCA that they are actively working to achieve good outcomes for all customers, a critical aspect of the Consumer Duty.

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Demonstrating customer understanding outcome

Under the third Consumer Duty outcome, Consumer Understanding, the FCA expects firms to take a holistic approach to ensure their communications enable consumers to comprehend products, features, risks, and decision implications so customers can pursue their financial objectives. This outcome complements existing disclosure requirements rather than replacing them. Firms should go beyond technical terms and consider whether their communications as a whole can be reasonably understood by customers.

Tailoring communications to customer characteristics, product specifics, communication channels, and the firm’s role is crucial. Understanding the unique needs and traits of the target audience, especially when vulnerable customers are involved, is paramount. While it is not expected that every communication will be tailored to each individual customer, firms must consider the information needs of their target recipients, taking into account factors such as the purpose of the communication and the intended audience. Many firms rely on generic communications, which may not effectively communicate important information or be understood by customers.

Firms are expected to continuously monitor and test their communications, and adapt them accordingly, taking into account factors such as purpose, context, timing, and potential impact of the communication. Firms should further review their terms and conditions to enhance readability and accessibility. Proactive customer communications are essential, including notifying consumers of changes and variations in products and services.

Testing communications with consumers is not mandated under the Consumer Duty, but firms must carefully consider whether and why they choose not to test directly with consumers, especially in channels with no direct customer contact, such as online and app-based sales. The onus is on firms to justify their testing approach and ensure they can demonstrate good outcomes. The choice of channels for promotion and onboarding is crucial, with consideration given to the target market and product suitability.

The task of demonstrating consumer understanding presents its own set of challenges. Customers often overestimate their comprehension of financial information, and behavioural biases can further complicate the evaluation process. Firms are urged to provide objective measures of consumer understanding, going beyond subjective self-assessment.

Regarding vulnerable customers, there are higher expectations under the Consumer Duty. Firms need to acknowledge and address multiple forms of vulnerability, extending beyond physical accessibility. Financial vulnerability can affect anyone, and firms must cater to customers with varying levels of financial literacy. Uncovering hidden vulnerabilities and addressing customers' reluctance to admit lack of understanding present challenges. It may be essential to go beyond traditional accessibility requirements like large print or braille. Firms need to focus on addressing hidden vulnerabilities, including financial unsophistication.

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Tech-enabled solutions for financial promotions

The higher standards set for financial promotions and communications more generally in the Consumer Duty era demand a fresh perspective on how firms review and approve these promotions. Many companies currently rely on tedious, manual procedures that frequently involve inefficient and occasionally conflicting interactions among product, marketing, compliance, and legal teams.

Tech-enabled solutions can help firms achieve Consumer Duty compliance more effectively, especially in gathering the relevant data to demonstrate the outcomes are being achieved. For instance, firms can gain insights from customers' behaviours on websites, such as tracking mouse movements and analysing time spent on specific areas, which can provide valuable data to substantiate organisations’ understanding of customer interactions. These tools can provide new avenues to gain deeper insights into customer engagement.

The emergence of more advanced regtech tools can support firms in delivering clearer and engaging communications that support consumers in making informed financial decisions. An Innovate UK project consortium (led by Deriskly, in partnership with Newcastle University) is developing an AI-powered solution to address the challenge of improving the clarity and comprehensibility of financial promotions. This project is a result of a fruitful collaboration between academia and the industry, aiming to leverage innovative tools and approaches to enhance consumer trust in financial services. The consortium has focused on integrating machine learning techniques, particularly natural language processing, in developing the solution. By utilising these technologies, the solution will assist firms in testing and improving the clarity and compliance of their communications and promotions.

The solution seeks to enhance efficiency, particularly for smaller firms that may have limited resources, as well as larger firms dealing with extensive amounts of data. This R&D project  places a strong emphasis on consumer testing. The project team actively engaged with thousands of consumers to gather their feedback on hundreds of financial promotions for a variety of lending and banking products. This data has been instrumental in training the AI models underpinning the solution, with the ambition of developing industry best practices for financial promotions and communications.

This collaboration has enabled Deriskly to develop a RegTech solution that goes beyond standard readability software, offering a more comprehensive and sophisticated approach to improve the understandability and clarity of promotions and communications while complying with the Consumer Duty. The automation and efficiency benefits offered by the solution could support and empower the first line in the process of handling promotions and communications more autonomously. This would further reduce the burden on the second line and foster more productive collaboration between different teams involved in the process.

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Conclusion

The introduction of the Consumer Duty has ushered in a new era of consumer protection in the financial services sector, with financial promotions being an important component of regulatory scrutiny. Since the Consumer Duty’s implementation date kicked off in July 2023, the FCA has taken proactive measures to strengthen its oversight of financial promotions, leading to increased monitoring and enforcement actions. Notably, the FCA has extended its regulatory reach to cover emerging areas such as cryptoassets and the Buy Now Pay Later products.

The Consumer Duty aims to address concerns regarding the rise of high-risk investments and the potential impact of behavioural biases on retail consumers. By emphasising the prevention of harm and promoting customer understanding, the FCA expects firms to act in the best interests of their customers. Compliance with the Consumer Duty requires firms to align their communications with the suitability of their products for the needs of customers in the target market, conduct thorough testing of financial promotions and communications, and consider the particular needs of different types of vulnerable customers.

Firms will inevitably face a multitude of challenges in adapting to the new regulatory landscape. New technological solutions offer opportunities for enhanced compliance, such as providing valuable insights into customer interaction and helping firms deliver clearer and more engaging communications.