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FCA plans to issue new guidance on 'digital disclosures' next year

Financial services firms will be issued with new guidelines on "digital disclosures" in 2017, the UK's Financial Conduct Authority (FCA) has said.13 Oct 2016

The FCA outlined plans to issue the guidelines in a new statement on smarter consumer communications (54-page / 765KB PDF) in which it said that "a predominately paper-based disclosure may not meet today’s consumer information needs".

It said it recognises that "technology is rapidly driving the transformation of the financial service sector", with consumers "moving away from traditional methods of engagement with service providers and opting for other methods of communicating". As a result, a "fundamental change in mindset" is required from firms over the way they communicate with consumers, it said.

"The FCA plans to produce and consult on guides on effective disclosure and digital disclosure in 2017," the FCA statement said. "This technological transformation presents exciting opportunities for customers, but also challenges for firms that must balance the ability to communicate clearly with their customers alongside ensuring compliance with all applicable rules and regulations."

"Further regulatory guidance on communications through the newer digital and mobile channels could encourage innovation while providing reassurance of compliance with the rules. It would also help to provide a level playing field among all market participants, which will aid customers in shopping around. This will provide firms with further guidance on the FCA’s expectations in the field of disclosure," it said.

Expert in financial services regulation Chris Davidson of Pinsent Masons, the law firm behind Out-Law.com, said: "There is a lot of uncertainty at the moment among firms over the way to approach digital disclosure and ensure the messages are legible. This is an issue particularly when engaging with consumers via mobile devices where there are screen size constraints. The FCA guidance will hopefully outline practices that can firms can follow to overcome this problem, but its latest statement suggests firms' desire to be able to use a click-through approach to convey important information is unlikely to be endorsed."

In its statement the regulator welcomed what it said were "examples of innovative communications in financial services" being put to use by some firms. Examples cited included the use of text alerts, video messaging and gaming features. Davidson said she has seen other examples of good practice in the market.

"Traditionally customer terms were laid out in screeds of text, but firms are now using tables to better explain the messages they want to get across, and also boxes with important information that use symbols to highlight key risks," Davidson said.

"While things like gaming features can be an additional method for engaging a young audience, it is worth noting the FCA's requirement that firms' communications cater for the individuals concerned, notably the ageing or vulnerable. It said communications designed for vulnerable consumers will likely be suitable for all the firm's customers. Fundamentally, firms must ensure that the financial products they sell can be marketed in a way which is clear and that appropriate information can be conveyed to customers on what they are buying in a way that is fair and not misleading," she said.

The FCA said firms should "use behavioural insights to create effective product and service information for consumers".

"We particularly encourage: move away from a tic-box approach to communication; prioritising efforts to ensure that information is effective for the intended audience and testing communications among real consumers, and; adopting innovative techniques to improve how key information about products is conveyed and delivered to consumers," the FCA said.

Alongside its statement, the FCA announced the removal of a number of "ineffective disclosure requirements" (40-page / 661KB PDF) from its Handbook as part of its drive to encourage smarter consumer communications, following through on proposals previously published in October 2015.

It will end requirements for some firms to produce a 'consumer-friendly principles and practices of financial management' (CFPPFM) document and regular short reports from 22 November. It will also remove some template disclosure documents used by firms to inform customers about their services and the costs of those services from February 2017.

The regulator's latest papers on the issue follow on from a discussion paper it issued on smarter consumer communications in June 2015 in which it said it wanted firms to move away from customer communications filled with "technical" language, and instead find ways to improve their consumer engagement, including by "adopting innovative techniques".

In its latest statement the FCA called on firms to "work together in developing consistent terminology and reducing the complexity of language and jargon". The regulator also confirmed that social media promotions for investments can include positive messaging about the "aspects of a product or service" so long as the "negative aspects" are also outlined in the same promotion. Image advertising can be used for this purpose, it said.

However, the FCA said it would not update its guidance on social media promotions despite pressure from some firms to do so. The firms have complained to the FCA that "rules around standalone compliance of financial promotions could be prohibitive when working in a digital/social media environment", the regulator said.

"FCA guidance requires that all financial promotions be standalone compliant, regardless of their form, content, location or target audience," the FCA said. "Standalone compliance is interpreted in our social media guidance as being incompatible with clicking through to more extensive material. In general, click-through approaches are compliant for messages that only signpost information to provide a link to more exhaustive material, but not for inducements that are ‘significant steps’ in the purchase chain."

"Although we appreciate that standalone compliance may result in some restrictions in the use of social media, there are strong behavioural economics arguments as to why standalone compliance may be the most appropriate approach. Therefore, at the current time, we will not be amending our guidance," it said.

The FCA also urged firms to do "more to improve the quality and effectiveness of T&Cs". It said it would challenge firms that claim they meet their disclosure obligations to provide information to consumers in a way which is clear, fair and not misleading simply because "a consumer clicks to open the T&Cs".

The FCA said: "We welcome existing efforts by firms to make the content of T&Cs more approachable and delivered in innovative ways, which may include videos or infographics. However, we believe improvements can be made and that the industry has a critical role to play. In order to facilitate progress, we will host a roundtable with firms by early 2017 to start discussions on how improvements can be made to T&Cs."

Davidson said: "It is interesting, given the additional scrutiny of the market by the Competition and Markets Authority, that the FCA raised concern about the information that price comparison websites are displaying to consumers on some products. The FCA has threatened to impose standardised terminology unless significant progress is made."