The state of Terms and Conditions and Policy Wordings after one year of the Consumer Duty

What progress has been made on understandability, and where can firms improve?

The Financial Conduct Authority’s (FCA) Consumer Duty has raised the bar when it comes to how firms are expected to communicate with their customers and potential customers.

Under the Consumer Understanding outcome of the Duty, firms are required to communicate not only in a way that is ‘clear, fair and not misleading’ but also in a way that customers are likely to understand, and that equips them with the information they need to make effective and informed decisions.

At Fairer Finance, we’ve been tracking the clarity of terms and conditions and policy documents for a decade.

These documents are rarely read in detail by customers when they take out a financial product (and often they aren’t read at all). However, when customers do need to consult their terms—to check whether they’re covered by their insurance, to understand how they make a claim, or to make a complaint—they need to be able to find and understand the relevant information, or else they’re at risk of getting poor outcomes.

We’ve noticed some improvement since the Consumer Duty came into force in 2023, but the average terms and conditions document is still unnecessarily difficult to read.

Reading grades

The chart below shows the average reading grade of terms and conditions/policy documents from different banking and insurance sectors.

Reading grades are calculated by looking at the average word and sentence length of a document.1 To convert from reading grade to reading age, add 4.5. These reading grades are calculated using the Automated Readability Index.

This metric isn’t enough on its own to show whether customers can understand a document. It’s a useful tool, though, for identifying documents that customers with poor literacy are likely to find hard to read. This is because customers with poor literacy tend to struggle with documents that have a lot of long words and long sentences.

According to the National Literacy Trust, 16.4% of adults in England, or 7.1 million people, have ‘very poor literacy skills’. This means

they can understand short straightforward texts on familiar topics accurately and independently, and obtain information from everyday sources, but reading information from unfamiliar sources, or on unfamiliar topics, could cause problems.

Those with poor literacy skills are classed as vulnerable customers under the FCA’s Consumer Duty. This means that firms have to take steps to show the regulator that their customers with poor literacy aren’t getting worse outcomes than those who aren’t vulnerable because the firm hasn’t taken the necessary steps to make its communications clearer and simpler.

As the chart above shows, there is considerable variation within sectors when it comes to reading grades. While you might assume that terms and conditions have to be difficult to read, some providers have written their documents in a way that avoids using unnecessarily long words or sentences. Although this doesn’t by itself mean that these documents will be understandable for those with poor literacy, it does prove that it is possible to write terms and conditions and policy wordings in a more approachable, digestible style, which is a good thing for all customers, vulnerable and non-vulnerable alike.

Sadly, average reading grades are still more or less where they were in April 2023, before the Duty came into force. This suggests most firms haven’t substantially re-written their terms/policy wordings.

Investment platform terms stand out as being especially difficult.

Jargon scores

While reading grades are a helpful way of assessing how hard a document is to read, they are based on word and sentence length. They don’t consider the difficulty of those words. Some short words, such as ‘writ’, are difficult to understand, which shows that using short words isn’t a guarantee of readability.

To measure how many difficult words a document contains, we developed a ‘jargon score’. This score counts the number of jargon terms in a document. We class as ‘jargon’ any term that we list under the headings of either legal jargon (e.g. ‘forthwith’), industry jargon (e.g. ‘third party’) or everyday jargon (words that could be swapped for simpler alternatives, for example using ‘purchase’ instead of ‘buy’). The jargon score also considers the severity of these jargon terms. ‘Aforesaid’ is counted as a more difficult jargon term than ‘arrears’, for example.

As with reading grades, there hasn’t been much movement since Spring 2023 on jargon, though pet insurance, bank accounts and savings terms do seem to be moving in the right direction. Investments terms, again, stand out as the most difficult.

There is also a wide range of jargon scores within sectors. As with reading grades, this shows that when firms make an effort to remove unnecessarily difficult words, the results can be dramatic.

Document length

Terms and conditions and policy wordings tend to be long documents. This is to some extent inevitable as these documents contain lots of important information, some of which is prescribed by regulation. It’s also true that length isn’t always the enemy of customer understanding. If a document includes a plain English explanation of a term that some readers might not understand (such as ‘excess’ in insurance, or ‘AER’ in savings) this will add to the length but increase understandability.

However, some documents are so long that they become off-putting and unwieldy. This is especially true where they don’t include tools that make them easier to navigate, such as clickable links in the table of contents (as is the case with the documents highlighted below).

Design

Writing terms and conditions in plain English is vital but if a document is poorly designed, customers are less likely to engage with it in the first place. They’re also less likely to be able to find the information they’re looking for, even if that information is plainly worded.

Many people, when they think of terms and conditions, imagine a black and white document with lots of densely-packed text. Documents like this come across as impenetrable and can give the impression that important information is hard or even impossible to access.

Most terms and conditions and policy booklets do contain at least some colour, and many make good use of a range of colours. Around 10%, though, are still in black and white. The comparison below between the Barlcays fixed term savings bond terms and the ManyPets policy document shows what a difference colour can make when it comes to making documents engaging and guiding readers to key information.

While using colour is good practice, providers should be careful not to use combinations or colours that are hard for customers with colour vision deficiency to see, and make sure that there is enough contrast between the text and the background to make all text easily readable.

What next?

If documents are very long, written in difficult language, have unengaging design, and are hard to navigate, it’s unlikely that customers will be able to use them to make effective and informed decisions. This is especially true for vulnerable customers such as those with poor literacy, or those who lack confidence in financial matters, who are more likely to find such documents off-putting and confusing.

Providers who haven’t touched their terms and conditions or policy documents in response to the Consumer Duty should consider whether their documents are fit for purpose in light of the Duty’s Consumer Understanding outcome. If they don’t measure up on the metrics descrbed above, the answer may be no.

1 The formula for calculating reading grades using the Automated Readability Index is:

Other formulas for estimating readability are available.

The analysis in this blog is based on a study of 150 terms and conditions documents and policy wordings across the following sectors: car insurance, current accounts, credit cards, home insurance, investments, pet insurance, private medical insurance, savings accounts, and travel insurance.