Vulnerable customers have finally reached the top of the regulatory priority list. Recent research from the U.K. Financial Conduct Authority (FCA) revealed that, by October 2020, 27.7 million adults (53 percent) possessed some characteristics of vulnerability. Meanwhile, 27 percent showed signs of low financial resilience.
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As furloughs unwind and debts are called in, we can expect a tsunami of indebtedness. These effects disproportionately impact younger adults aged 18-34, while retirees might have accumulated more savings. And it is the young, too, recording the highest levels of mental health issues because of the pandemic.
The FCA defines vulnerable customers as those “who, due to their personal circumstances, [are] especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.” New guidance issued in February sets out what will be expected of firms in providing an appropriate level of care.
Crucially, the FCA wants to see “the fair treatment of vulnerable customers embedded as part of a healthy culture throughout firms, not just on the frontline but also in areas such as product development.” Senior management is held responsible for making this happen.
The FCA will be looking for, at the very least, the following four elements in vulnerable customer strategies:
- Understanding the needs of your customer base (and target market);
- Staff having the competencies to recognize and respond to these needs;
- Product design and customer communications reflecting these needs; and
- A focused, regular monitoring and review process.
Some of these requirements might include elements that were not previously a compliance concern, such as ensuring frontline staff receive practical and emotional support. Firms might consider giving staff wind-down time at the end of the day or after certain difficult cases.
The TEXAS Model
TEXAS helps ensure staff record the most relevant information about characteristics of vulnerability and how these characteristics affect support needs while helping to meet data protection requirements. The steps of the model include:
- Thanking for disclosure
- Explaining how information will be used
- EXplict consent or extra checks
- Asking good questions
- Signpost to internal or external support
Source: Financial Conduct Authority
Understanding customer needs
A tick-box approach to the easier-to-spot issues, such as poor language skills or problem debt, is insufficient. Vulnerable customers will have additional or different needs that might limit their ability to make decisions or be less able to represent their own interests. This might be because of a difficult life event, such as bereavement, unemployment, or divorce, or because of longer-term health problems. It could even be an underlying lack of financial and digital capability.
All these groups could be at greater risk of harm, and many will have linked or overlapping issues. Firms should be looking out for:
- Situations that put customers under stress;
- Preoccupations with problems that might impair decision-making or reduce “processing power” (e.g., medical conditions);
- Lack of perspective or experience (such as previous financial exclusion) that limits seeing the “bigger picture”; and
- How stressful situations change attitudes to taking risks.
There might be new perspectives for compliance here; a key question to ask is, “How are customers affected by circumstances at the time they are making decisions?” The overall aim is to reduce the chance of poor outcomes.
The FCA’s guidance sees sensitive product design as central, making products that are accessible, inclusive, and flexible. Stress testing before launch is an important area for compliance action, and compliance training will become even more important in supporting the embedding of new understandings and practices. There is also an associated agenda to consciously build in financial education to help consumers mature their responsibilities and develop their financial health (including safe digital habits).
This focus on vulnerable customers forms part of a wider approach by the FCA to strengthen customer protection generally. Yes, we already have the 2007 Treating Customers Fairly guidance and the 11 Principles for Businesses, but that might not be quite enough.
The FCA published in May an important consultation on “A New Consumer Duty” to “set higher expectations for the standard of care that firms provide to consumers.” This is a must read for all firms in retail markets. The proposal contains three primary components:
- A new consumer principle within the existing set of principles for businesses. Options include “a firm must act to deliver good outcomes for retail clients” or “a firm must act in the best interests of retail clients.”
- Cross-cutting rules requiring firms to take all reasonable steps to avoid causing foreseeable harm to customers, to enable customers to pursue their financial objectives, and to act in good faith.
- Detailed outcomes covering communications (what, how, and when); products and services (including how they meet the needs of vulnerable customers); customer service (including avoiding hinderances that keep customers in a product or service); and price and (fair) value.
All these elements will incorporate the concept of reasonableness. Other jurisdictions are sure to be watching to see how this stream plays out. It could be said regulators are simply asking firms to put themselves in their customers’ shoes.
The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.
David Jackman is a NED chair and ICA tutor. He was previously FSA Head of Education and Business Ethics and is the author of “The Compliance Revolution.”