The FCA has delivered a clear verdict on Consumer Understanding under the Consumer Duty and the message for firms is unambiguous. Following a supervisory review of 38 firms, the regulator has set out where it sees good practice, where firms are falling short, and where its supervisory focus will land next.
This is not theoretical guidance or a future consultation. It reflects live supervisory findings and provides a clear signal of what the FCA now expects firms to evidence in practice. If you serve retail customers, this applies to you, regardless of sector, size, or business model.
In this blog, we cut through the noise to explain what the FCA reviewed, what “good” now looks like, where firms are most exposed, and crucially, what action firms should be taking now.
Why this paper matters
Consumer Understanding is one of the four core outcomes at the heart of the Consumer Duty. The FCA’s expectation is straightforward but demanding: customers must receive information that is fair, clear and not misleading, at the right time, and in a format they can genuinely understand and act upon.
The regulator’s findings are stark. While many firms can describe their frameworks, controls and policies, far fewer can demonstrate, using credible evidence, that these are actually improving customer understanding. The FCA is clear that this gap is not isolated. It believes weaknesses are widespread.
In short, process alone is no longer enough. Firms must be able to prove impact.
Where the FCA has observed weaknesses
The FCA’s review focused on five interconnected areas, all of which now represent clear supervisory risk if not addressed.
Management Information (MI) and testing
Many firms collect data such as complaints, drop‑off rates and contact volumes, but struggle to show how this insight is being used to improve customer understanding. Testing is often superficial, one‑off, or poorly evidenced. Critically, the FCA now explicitly rejects the absence of complaints or strong sales performance as evidence that customers understand what they are buying.
Innovation and communication design
Superficial improvements, such as shorter wording, new icons or light visual changes are common but often fail to address the real drivers of misunderstanding. Long, complex documents without summaries or clear signposting remain prevalent, and communications are frequently not tailored to customers with lower financial capability.
Vulnerability and accessibility
While many firms reference vulnerability in policy, practical application is often weak. The FCA found limited evidence that vulnerability considerations were genuinely shaping communications or journeys. Alternative formats were inconsistently available, and initiatives were rarely embedded into governance or ongoing monitoring.
Financial promotions
Promotions continue to emphasise benefits while downplaying risks and limitations. Many firms rely on compliance sign‑off or sales data alone, without testing whether customers actually understand what is being presented to them. Risk warnings are still too often buried or poorly presented.
Governance and Oversight
Accountability for Consumer Understanding is frequently unclear. While monitoring is described, there is limited evidence that insights are escalated effectively or used to drive meaningful change. Too many Board and committee reports focus on compliance metrics rather than whether customers are genuinely making informed decisions.
What firms should be doing now
The FCA’s message is clear: monitoring customer understanding is not enough. Firms must act on what monitoring reveals and be able to evidence that interventions are improving outcomes. Policies and frameworks alone are not enough.
To move from exposure to confidence, Square 4 recommends firms act now on the following priority actions:
- Strengthen MI by moving beyond operational and sales data to insight that genuinely shows how customers interpret information and make decisions. This includes behavioural indicators, comprehension testing results, customer feedback and root cause analysis from complaints and issues.
- Segment effectively to understand how levels of understanding differ across customer groups, particularly for customers with characteristics of vulnerability, lower financial capability or digital exclusion.
- Upgrade testing frameworks by combining complementary approaches such as desk‑based reviews, behavioural insight, comprehension testing, outcomes testing and real customer case assessments to build a rounded and defensible view of customer understanding.
- Embed meaningful monitoring that demonstrates whether customers understand key features and risks, can compare options, and can act in their own interests across the full customer journey.
- Maintain timely oversight by treating monitoring as a continuous, dynamic process rather than a pre‑launch or one‑off exercise, with clear escalation to senior management and Boards.
- Reassess financial promotions through a Consumer Duty lens, focusing not just on compliance but on whether promotions actively support or undermine consumer understanding.
- Clarify governance and accountability so Boards and senior leaders have clear visibility of Consumer Understanding risks, the effectiveness of interventions, and where further action is required.
The bigger picture
This Consumer Understanding paper is one of six FCA good practice publications issued in the first ten weeks of 2026. It should be read as part of a deliberate and accelerating supervisory agenda, all anchored in the same core expectation: firms must deliver good outcomes for retail customers and be able to evidence that they do so.
Consumer Understanding sits at the centre of that expectation. If customers do not understand what they are buying, the risks they are taking, or the choices in front of them, good products and fair pricing alone will not deliver compliant outcomes.
Firms that engage with this paper honestly, assessing themselves against the FCA’s areas for improvement and acting decisively are not just responding to regulatory pressure. They are meeting the intent of the Consumer Duty and Principle 12.
How Square 4 Can Help
At Square 4, we help firms move from regulatory awareness to regulatory confidence.
We support firms of all sizes with Consumer Duty gap analyses and health checks, Consumer Understanding and communications reviews, vulnerability diagnostics, and outcomes testing frameworks. We also deliver Board‑level training and provide ongoing, independent oversight through flexible retainer support.
If this paper has raised questions about where your firm stands or how confident you would feel defending your approach to the FCA, we’d welcome a conversation. For a deeper dive into this topic, see our Outcomes Monitoring practical guide whitepaper.
Please contact us at hello@square4.com
Nicola Crump
Advisory Director
