‘Consumer understanding’ – a higher expectation of Consumer Duty regulation

In its Policy Statement (PS22/9), in July 2022, the Financial Conduct Authority (FCA) presented `the final rules and guidance for a new Consumer Duty regulation (`the Duty`) that sets higher expectations for the standard of care given to consumers. Its aim is stated as `to drive a healthy and successful financial services system in which firms can thrive and consumers can make informed choices about financial products and services.

The regulations require Independent Financial Advisers to adopt an `outcome-focused approach’ and to evidence steps taken to protect their clients from harm, at every stage in the quest for optimum returns on their investments. One of the (four) key outcomes that the FCA expects to be achieved is `consumer understanding’. Albert Einstein would approve:

“Any fool can know. The point is to understand.”

Whilst the Policy Statement provides illustrations and guidance about how other expected outcomes related to `suitability’ of advice and the provision of `fair value’ may be met, it remains largely silent on what `consumer understanding’ means and how it may be verified. Nevertheless, it appears likely that the FCA will expect those engaged in the provision of financial services and products to evidence attainment of all the outcomes it has specified in the Policy Statement.

A review of regulations applied in other `duty of care’ professions and academic research into the complex concept of `understanding’, has provided foundations for creation of a framework for the development and verification of `consumer understanding’ in the context of the provision and receipt of financial planning advice. It seems an opportune moment for professional practitioners to come together to determine best practice in this regard. In doing so, it is clear there is a higher expectation of duty beyond gaining informed consent to act on their client’s behalf.

The concept of informed consent is said to have arisen in human medicine during the early 20th century, based on the opinion that human beings owned their own bodies, thus having a legal right to submit, or not, to treatment. It is particularly interesting to note, however, the duty of veterinary surgeons in both gaining consent to treatment and client understanding.

Section 11 of The Royal College of Veterinary Surgeons’ Code of Professional Conduct (June 2014) states:

• “Consent must be ‘informed’. In simple terms, the owner (of the animal) must understand the nature of the procedure or treatment to be undertaken, the financial implications and the principal risks and possible side-effects which may ensue.”

Sections 11.3 and 11.4 of this code extend professional responsibilities beyond gaining consent to treatment:

• “11.3 Veterinary surgeons and veterinary nurses should seek to ensure that what both they and clients are saying is heard and understood on both sides, and encourage clients to take a full part in any discussion. If there is any doubt about the client’s consent, efforts should be made to resolve this, which are then recorded.”
• “11.4 Where the client’s ability to understand is called into question, veterinary surgeons and veterinary nurses will need to consider whether any practical steps can be taken to assist the client’s understanding.”

These dimensions to fulfilment of consumer duty make clear that:

• Individuals seeking to protect their clients from harm should drive the process to ensure that all parties understand the potential consequences of their actions.
• When the competency of a client to take an informed decision is called into question, practical steps should be taken to assist understanding.
• Efforts to enable understanding and to resolve doubts about a client’s consent should be recorded.

The challenges regulations present to veterinary surgeons appear similar to those presented to independent financial advisers under the FCA’s Consumer Duty regulations. A good outcome for this paper would be to prompt effort to meet the challenges laid down by the FCA. A second contribution from Albert Einstein suggests a way forward:

“The most practical solution is a good theory”

There is a wide body of research and literature from medicine, Higher Education and philosophy to call upon to inform development of theory to address the key questions:

• How can an adviser evaluate a client’s capacity to understand information conveyed to him/her?
• How can you test that information conveyed has been understood?

And underpinning these questions:

• What are the key components of effective communication?

Here is a proposed title for the research and discussions that may take place:

A theoretical framework for development and verification of consumer understanding in the provision of financial planning advice.

Variable No.1: Effective communication

The philosopher, Aristotle, identifies three essential components of effective communication: Ethos, Logos and Pathos.

Ethos relates to the way in which an adviser may convince the client of her / his professional and technical expertise, and character. Ethos can be developed by choosing language that is appropriate to the audience and topic.

Logos relate to the clarity and coherence of communication. It helps a client understand information if it is presented in a logical sequence and with reasoning that can be followed.

In a domain where financial literacy is poor, there is a danger of information overload and a client’s inability to grasp key concepts, such as investment risk, if the adviser’s language, or reports, do not demonstrate logos.

Pathos. This is arguably the most important component of effective communication. It is imperative that advisers show empathy towards the client and the circumstances that may influence decisions to be made.

Variable No.2: Learning and / with Understanding

In keeping with Einstein, Carpenter and Lehrer (1999) would agree that making sense of something, in a meaningful way, requires more than receipt of `knowledge’ :

• “Unless students (clients) learn with understanding, whatever knowledge they acquire is likely to be of little use outside of the classroom (adviser’s office)”

According to other scholars in education, some of the components that prompt and facilitate learning and understanding include:

2(i) The Discipline of Noticing

This discipline is commonly referred to as `researching from within’ and relates to efforts to equip and support people to notice proactively and sensitively what is going on in the world around them and to make sense of it for themselves.

The idea is to prompt those in receipt of complex information to challenge themselves to think through the possible implications of what is being conveyed to them, rather than be passive recipients of information.

2(ii) Personal reflection

Personal reflection is acknowledged as a key component of deeper understanding and develops learners’ `ownership’ of the material of learning – making it more personally meaningful to them.
Reflection encourages metacognition, but the process takes time. It is important that advisers give clients time to absorb and reflect upon all that is conveyed to them.

The outcome will be greater awareness of their own values, beliefs, requirements, judgements, and behaviour. It will also identify areas in which more help is required for them to understand and make sense of what is going on, and proposed.

2(iii) `Teaching-back’

Application of the concept of `teaching-back’ appears particularly relevant and helpful in a financial planning situation. Rather like in a veterinary situation, if clients were challenged to `teach-back’ and explain all that they had understood to someone else, misunderstanding would be exposed. The adviser would be obliged to provide additional support and guidance until there was a sufficient level of understanding, by all parties, to proceed.

With thanks, once again to Albert Einstein, a simple, practical step to test understanding is:

If you can’t explain ‘it’ simply, you don’t understand ‘it’ enough.

Variable No.3: Capacity to take informed decisions

Great effort has been expended in medical research to try to measure the capacity of individuals to take risky decisions. The capacity to do so is recognised as being situation-specific, rather than something that is fixed.

Four elements of decision-making capacity have been defined:

• understanding (understanding of the given information on the informed consent)
• appreciation (evaluation of benefits and risks of the proposed treatment or research),
• reasoning (thinking about the possible effects of treatment or research on daily life, and reasoning during the process of decision making),
• expression of choice (the patient’s or individual’s ability to express his or her choice).

A deficit in any one of these four abilities can mean that the decision-making capacity of an individual is impaired.

Thought needs to be given to how the outcome of this research can be adapted and used as a framework for exploring capacity of those working in and considering financial advice.

How to determine consumer understanding?

The challenge for those engaged in the provision of retail financial planning advice lies in the multi-various, dynamic, invariably complex, and often irrational forces that impact upon human behaviour. It is incredibly difficult, if not impossible, to determine the point in time when, and how, an adviser could claim a client has understood all that is needed to protect them / themselves from harm.

Taking a leaf out of books into research in the medical field suggests adoption of a semi-structured interview process (Mac-cat T tests) to glean and analyse information obtained. Much work needs to be done to identify the questions to be posed, when and how to pose them, and how to evaluate responses. The sooner this work commences the better.

The next steps

Given the impossibility of making unequivocal statements of consumer understanding, meeting the higher expectations of the FCA rests upon recording reasonable and reasoned efforts to achieve this outcome. Everybody in the profession appears vulnerable to failing in their duty of care until the signature on an informed consent simultaneously evidences attainment of a consensual understanding of the suitability of advice and action taken. Now seems a good time to try to push back the boundaries of knowledge and understanding of informed and understood consent to try to reduce this vulnerability.

This paper calls upon regulatory authorities, practitioners and other stakeholders in the process of providing financial planning advice to come together to advance our knowledge and understanding in this field. The final step would be to put into practice the good theory that is collectively determined.

Carpenter and Lehrer
Teaching and Learning Mathematics with Understanding

Professor Trevor Williamson
Retired lecturer
https://www.linkedin.com/in/trevor-williamson-non-exec-director/