story

Buying a financial product? Beware of convoluted language

By Mario Kienzler, Kinga Barrafrem & Daniel Västfjäll
Posted on June 08, 2020

Imagine Casey, a pretty smart guy with a good job and a steady income. His understanding of financial fundamentals is more than basic, yet financial decisions tend to confuse him. How should he save for his retirement? Are stocks a good investment, or should he find out more about index funds? And his new car needs an insurance - but which one? The way financial products are described, does not help.

Unfortunately, many people feel like Casey. According to the UK’s Financial Conduct Authority (FCA), ‘the way financial products are communicated and marketed can make it difficult for consumers to understand and identify the right products for them’ (Rowe, De Ionno, Peters, & Wrigh, 2015, p.31). As consumers face increasingly complex financial decisions (Lusardi, 2015), consumer protection organizations warn of the risk of convoluted language when used to describe financial products.

Don't say it like that - not now!

The economic consequences of the unfolding COVID-19 crisis may even increase this risk. Consumers who face job loss or reduced income for an extended period of time may need to reorganize their personal finances. Whether or not to take loans, save money for retirement or renew their insurance policies - it's crucial to understand the consequences of these choices, particularly in these uncertain times.

In the context of financial products, we define convoluted language as communication from financial institutions that the average consumer finds difficult to understand. There's an often excessive use of the following elements:

  • Jargon, lingo, or terminology
  • Difficult sentence structure
  • Passive voice

A further issue is that the use of convoluted language may be intentional, implying a certain intent to deceive. Some financial institutions may deliberately market their products in a way that make them harder to compare to competing products.


Our research project and its potential impact

To investigate the use of convoluted language in financial products, our current project focuses on the car insurance sector. Why? First of all, many consumers do not fully understand their car insurance policy (Financial Services Authority, 2006). Secondly, a survey of millennials by Clearcover found that over 7 out of 10 respondents believe that car insurers deliberately make their policies hard to understand (Patel, 2019). Finally, all car owners in the EU are legally required to have a valid car insurance policy (European Union, 2019), even though they may not fully understand what they are buying, or suspect they are being deliberately misled.

We made four predictions about the negative impact of convoluted language on consumers:

  • that it undermines consumer understanding of car insurance policies, as difficult sentences make it harder to understand what type of cover the policy provides;
  • that it makes consumers more likely to go for a non-optimal car insurance;
  • that it makes consumers feel anxious and insecure, decreasing their financial well-being;
  • that it reduces consumers’ purchase intention for car insurance policies.

We also suspected that convoluted language does not affect all consumers equally. Those with a stronger belief in their own financial abilities, better financial knowledge, and a greater numerical aptitude in particular, may be less affected. We contend that it is important to formally investigate these issues in order to identify which consumers are most likely to be disadvantaged by unclear insurance policies.

Findings so far

We tested our predictions with two online experiments with almost 900 UK nationals. Our combined sample comprises men and women, ranging from 18 to 82 years old. Both experiments used a short scenario in which respondents were asked to imagine to be looking for a car insurance. The scenario then showed them one car insurance policy, with terms and condition similar to those of car insurance policies currently available in the market. We randomly assigned one group of respondents to the simple version, and the other to the difficult version. Describing the compulsory excess fee, for instance, the two versions read as follows:

“We will pay to repair or replace your car’s glass windscreens, sunroof, and/or glass windows after it has been damaged in an accident. You will need to contribute £55 for each accepted request for payment, and we will cover all remaining costs” [simple version]

“The insurance policy will provide unlimited coverage of the insured motor vehicle for accidental damage to that necessitates the repair or replacement of glass windscreens, sunroofs, and/or glass windows, less the compulsory excess of £55 per covered claim.” [convoluted version]

By varying the language used to specify the policy’s terms and conditions, we assessed how consumers react to various versions of the same information. For example, we asked them a number of questions about their perceived financial anxiety and financial security regarding the car insurance policy.

Preliminary analysis of experiment 1 indicates that convoluted language does indeed have a negative effect on consumers. For example, respondents who saw the more convoluted version reported feeling more anxious and less secure about the car insurance policy compared to respondents who got to see the simpler version (see Figure 1).

Upcoming implications

We're currently analysing the data from our second experiment to see if consumers’ financial abilities and knowledge reduces the negative effects of convoluted language. Our next step is to further investigate the impact of convoluted language on consumers. We'd like to find out if their anxiety goes hand in hand with a lower financial understanding.

We believe our project will have important implications for policy makers, who can consider our results when deciding how to regulate language of financial products. They could, for instance, encourage financial institutions to provide a readability score (like a traffic light system) on their products. Complex insurance policies marked with a red sign would warn average consumers that perhaps they'd be better off with a product that's easier to read and understand.


Mario Kienzler is a Researcher at the Division of Industrial Economics at Linköping University

Kinga Barrafrem is a Postdoc in Economics at Linköping University

Daniel Västfjäll is Professor of Cognitive Psychology at Linköping University

References

  • European Union (2019). Car insurance validity in the EU. Retrieved 14 April 2020 from https://europa.eu/youreurope/citizens/vehicles/insurance/validity/index_en.htm#shortcut-4
  • Financial Services Authority (2006). Motor legal expenses insurance: Consumer market research. Retrieved 19 April 2020 from https://www.fca.org.uk/publication/research/fsa-mlei-consumer-research.pdf
  • Lusardi, A. (2015). Financial literacy: Do people know the ABCs of finance? Public Understanding of Science, 24(3), 260–271.
  • Patel, A. (2019). A snapshot: Today's car insurance customer. Retrieved 13 April 2020 from https://blog.clearcover.com/posts/car-insurance-customer-research
  • Rowe, B., De Ionno, D., Peters, D., & Wrigh, H. (2015). Mind the gap—Consumer research exploring experiences of financial exclusion across the UK. Retrieved 14 April 2020 from https://www.fca.org.uk/publication/research/mind-the-gap.pdf