Regulatory update: TR17 / 1 – Customer understanding (retail banks and building societies)

Posted: 8th August 2017

Background

On the 17th July 2017, the FCA published the findings of its thematic review into banks’ and building societies’ assessment of customers’ level of understanding of the services they receive.

The FCA previously commissioned a survey of 17 retail banks and building societies to review how they assess whether their customers understand the products they had bought. Building on the survey results, the FCA subsequently conducted a thematic review involving 18 retails banks and building societies.

The survey was conducted in response to the Parliamentary Commission on Banking Standards (PCBS) recommendations, which stated:

“Banks need to demonstrate that they are fulfilling a duty of care to their customers, embedded in their approach to designing products, providing understandable information to consumers and dealing with complaints.”

The PCBS report also said:

“A bank has a responsibility to ensure that customers have had a reasonable opportunity to understand a transaction, having regard to their knowledge and personal circumstances.”

Key Points

The FCA’s review has identified that firms are proactively embedding or developing systems and practices to assess customer understanding of products throughout the lifecycle of a product.

Firms have described the benefits to their customers, and to the firms themselves, of ensuring that customers understand the products they purchase. The review notes that firms have also stated they believe better understanding leads to greater customer loyalty, increased business, lower complaint volumes, and an overall contribution to positive culture.

More specifically, the FCA’s review found that:

• Firms are aware of the importance of assessing customer understanding and are proactively developing practices to enhance this
• Some firms have made good progress in developing practices to give consumers a reasonable opportunity to understand the products they have bought
• A few firms continue to confuse ‘customer understanding’ with ‘customer satisfaction’
• The most developed systems and practices for assessing customer understanding are undertaken post-sale; for example - through customer contact exercises
• Practices appeared least developed in online sales, but many firms were taking steps to develop this area further

Consideration for firms

Firms should be actively reviewing the examples in the report when considering how to develop their responses to the PCBS recommendations. In particular:

• Firms should look to review their sales lifecycle and proactively identify areas of highest risk from a customer understanding perspective
• Firms should be able to proactively test potential issues with consumer understanding by assessing customer outcomes and clarifying understanding, post-sale
• Online sales channels were noted as a particular risk by the regulator, and should be a key area for further investigation by firms
• Firms should ultimately consider their current positioning on customer understanding to ensure that there is no confusion with customer satisfaction and ensure the wider business recognises this difference and what it means in terms of behaviour and activity