Customer vulnerability in financial services: not a tick-box exercise
30 October 2024
Speaking at an event for the investment management industry at the end of October, Grame Reynolds, Director of Competition at the Financial Conduct Authority (FCA) told the audience that “vulnerability is not a buzzword”.
The concept of customer vulnerability is one of the key elements of the Consumer Duty whereby firms must ensure that vulnerable customers have outcomes as good as other customers. The FCA have made clear in the past that vulnerable customers may have additional needs or be at greater risk of harm and that the Consumer Duty requires firms to pay attention to the specific and individual needs of these customers.
Reynolds identified that the word “vulnerability” is at risk of becoming something technical, a mere “tick box”, given that it is being used so frequently. He expressed that vulnerability refers to real people; those going through key life experiences such as ill health, personal stress, bereavement or job loss and the idea that their capacity to make good decisions about their finances may be impacted as a result. He said that the FCA wants firms to be able to proactively recognise vulnerability in people and take action to address the risk of financial harm to these individuals; he described this as a business necessity and crucial to providing good services.
Reynolds made clear that firms need to take time to understand what vulnerability means for their business and their client base, and that a standardised approach does not account for the wide range of characteristics of vulnerability. Monitoring and evaluating effectiveness of approach to vulnerable customers is also important, firms should be using data to test if outcomes are being achieved.
As is often the way with the FCA, Reynolds spoke about good behaviour that the FCA had identified within firms, those who “got it”. These types of firms identify customers with vulnerability, understand how this impacts customer needs then provide those individuals with tailored support, making adaptations to ensure financial services work for their diverse client needs.
Of course, these firms who “got it” also monitored outcomes to continually improve services for vulnerable customers. Examples of bad practice were also identified, such as vulnerable customers paying high fees that were not aligned with fair value (for example, elderly clients with small portfolios paying large chunks of their portfolio in fees).
Finally, the FCA set out some key actions for firms in dealing with vulnerable customers:
- Identify who is vulnerable;
- Consider how to support these people, including issuing clearly understood communications with well-trained and empathetic customer service;
- Think pragmatically and proportionately about what a good client outcome is for the service, use data to test how services are being received and whether that is what was intended;
- Be open with the FCA: if firms are not sure, or have an issue as to vulnerable customers, come to them; and
- Digest the work published on the Consumer Duty (including vulnerability guidance) and learn from the good and bad practice examples.
Reynolds concluded that the FCA’s work on vulnerability links into its growth mandate. The goal is to ensure that people are delivered the financial wellbeing they deserve not only when times are good but “when the chips are down”; when they are vulnerable.
The Birketts view
In its review of firms’ implementation of the Consumer Duty the FCA has repeatedly made the point that there is more work to be done on vulnerable customers. The fact that the FCA is still speaking about this in October 2024 makes clear that they are still not satisfied with how firms are dealing with their vulnerable client base.
The expectation of the FCA is that firms take a tailored approach to their specific customer base rather than “ticking a box” as to dealing with vulnerable customers. Of course, there is significant cost in assessing individual characteristics of vulnerability in a firm’s client base and specifically tailoring services and outcomes as a result (as well as monitoring approach and making adjustments). Nevertheless, firms must endeavour to follow the FCA’s suggested approach as this will no doubt continue to be an area of focus for the FCA and a potential area for enforcement action in the coming years.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at October 2024.