Industry review of institutions' clear language policies and procedures

Summary of outcome

In June 2012, the Financial Consumer Agency of Canada’s (FCAC) Compliance and Enforcement Branch (CEB) reviewed the current state of clear language practices within federally regulated financial institutions (FRFIs). This phase of the Industry Review involved the analysis of FRFIs’ policies and procedures regarding clear language.

In light of legislative and regulatory requirements, as well as the Commissioner’s Guidance on Clear Language (CG-3 or the Guidance) ^{Footnote 1} , FCAC sought to assess the extent to which FRFIs had incorporated the five principles of clear language, which were detailed in CG-3, into their policies and procedures for developing consumer disclosure documents. CEB concluded that, based on the documents provided, the majority of the FRFIs assessed did not demonstrate that they adequately incorporated the principles of the Guidance into their procedures.

Background

The Cost of Borrowing Regulations require federally regulated financial institutions to provide consumers of financial products with disclosure that is clear, simple and not misleading.

Following the announcement of the proposed amendments to the plain language provision of the Cost of Borrowing Regulations in September 2009, FCAC’s Commissioner issued guidance to the industry in the form of principles and guidelines on clear language and presentation. The purpose of the Guidance was to help FRFIs integrate the key principles of clear and simple language into their internal processes for developing disclosure documents for their customers.

Participants

CEB selected 59 FRFIs to participate in this review, based on their responses to FCAC’s 2011 Risk Assessment Model (RAM) questionnaire^{Footnote 2} . All selected FRFIs offered lending products covered by the Cost of Borrowing Regulations.

Scope of the review

CEB’s objective was to assess how financial institutions implemented the Commissioner’s principles and guidelines into their policies and procedures for developing consumer disclosure documentation.

In order to produce an accurate industry assessment of how FRFIs have integrated the Commissioner’s guidelines and ensured that the principles have been respected, CEB requested all participating FRFIs to provide the following:

• their internal policies and procedures on clear language
• information on any clear language initiatives they may have undertaken^{te 3} .

To carry out the assessment, CEB conducted a detailed review of the documentation provided.

Criteria for document review

Throughout this review, CEB considered the following criteria:

• clear language policies and procedures
• history and initiatives in clear language
• training, including whether clear language policies and procedures were accessible to employees and their role in employee training
• control measures to help ensure compliance with the Regulations, such as sign-off forms, checklists, testing, focus groups, feedback and surveys.

Observations and findings

All selected FRFIs except for one responded to CEB’s documentation request. Generally, FRFIs responded to our initial enquiry in one of four ways:

• They indicated that they had complete policies and procedures regarding clear language and provided details.
• They indicated that they did not have a policy or procedure regarding clear language.
• They indicated that they had policies and procedures but did not provide any details.
• They provided what appeared to be a copy of the Commissioner’s guidelines as their policies and procedures with no additional clear language principles of their own.

Policies and procedures practices

The actions taken by FRFIs in light of CG-3 fall along a wide spectrum of practices regarding the implementation, integration and use of clear language policies and procedures.

Most FRFIs generally fell at one extreme or the other of this spectrum: showing either comprehensive integration of CG-3 principles into policies and procedures, or little to no integration of the principles. The table below highlights the key characteristics of the two extremes that the review of documents revealed:

Based on the documents provided and CEB’s assessment, several respondents had complete policies and procedures regarding clear language and provided details to support it. However, the information provided by the majority of respondents showed little integration of the Guidance into their policies and procedures for developing consumer disclosure documents, which fell well short of expectations.

Best practices observed

The review highlighted several different approaches with respect to how FRFIs chose to incorporate the Guidance into their policies and procedures for clear language, as well as those for the development of consumer disclosure documents. FRFIs that appeared to have the most complete policies and procedures typically followed one or more of the following good practices:

• They made clear language not only a regulatory requirement but also integrated it into their culture, implementing clear language principles throughout the organization (e.g., marketing, business and legal units). This ensures a standardized process for drafting, amending and reviewing disclosure documents across all credit product lines.
• They integrated examples of tools used by employees responsible for meeting clear language principles—for example, a list of words to use and words to avoid when reviewing the disclosure’s content.
• They used checklists that focused on outcomes, not principles, which reduces subjectivity and errors in understanding resulting from different interpretations of principles. For example, one required the employees of the product group to read the final disclosure document themselves, and then determine whether everyone came to the same conclusion about terms and rates.
• They had clear-language policies that encouraged employees to raise compliance concerns and delineated a clear chain of escalation for employees with concerns, with the contact information of each step of the chain embedded into the policy.

FRFIs’ views and opinions

FRFIs that adequately incorporated CG-3 into their policies and procedures shared the following views:

• Institutions that embraced clear language as not only a regulatory obligation, but also a tenet of superior customer service, recognized^{Footnote 5}  that they generally experienced very few compliance issues regarding clear language. Further to this observation by FRFIs, FCAC can attest to receiving few complaints^{Footnote 6}  regarding clear language or consumers not being able to understand disclosure documents.
• Ensuring both the FRFI and the debtor have the same expectations, through clear and simple disclosure documentation, is an intuitive step toward fewer complications, complaints and non-performing loans later.
• Clear and simple disclosure helped their consumers manage their finances more successfully.

Conclusion

Several FRFIs developed adequate policies and procedures that demonstrated comprehensible steps, including training and control measures, that would help ensure their disclosure is clear, simple and not misleading for their consumers. Comments from these institutions alluded to clear language being a part of their culture, not only from a regulatory perspective but also from a “good customer service” perspective.

However, many FRFIs made minimal efforts to incorporate the Clear Language Guidance into their policies and procedures. FCAC is concerned that these FRFIs may be less likely to consider or incorporate the clear and simple language principles when developing and/or amending disclosure documents for consumers. In turn, this could lead to increased risk of non-compliance with the relevant clear language provisions in the Regulations. Therefore, it is clear that many FRFIs will need to take steps in order to improve and further develop their policies and procedures as soon as possible.

Expected actions by FRFIs

Each FRFI is responsible for ensuring compliance with the regulatory requirements in the Cost of Borrowing Regulations. Where changes are required to improve documentation, processes or approaches, CEB expects that all institutions will incorporate the required amendments.

In light of these conclusions, all FRFIs should review the findings, best practices and conclusions drawn from this exercise in the context of their own internal disclosure document development procedures.

CEB expects all FRFIs to perform a self-assessment to identify any gaps in their own policies and procedures for producing clear disclosure documentation, and in light of that self-assessment, develop a plan to address any deficiencies identified in respect of the Clear Language Guidance. The results of the self-assessment and any subsequent follow-up plans should be communicated to CEB as soon as they have been completed.

Furthermore, as part of the self-assessment work, FRFIs should also look to establish processes to disseminate information on those policies and procedures within their organization (e.g., to business lines, marketing and compliance groups, legal and senior management) through appropriate communication vehicles (e.g., training documents, communiqués, etc.)

This will help ensure that any future reviews by CEB of FRFI in-market disclosure documentation reflects the work FRFIs will have undertaken to revise and improve their policies and procedures, and will allow FCAC to determine the effectiveness of the clear language policies and procedures implemented. Presently, it is expected that CEB will initiate such a review of consumer disclosure documentation in the 2014–2015 period.