Regulatory update: The FCA's approach to protecting vulnerable customers

Posted: 30th November 2017

The increasing focus the FCA has placed on protecting vulnerable consumers has become even more clear with the recent publications of its Financial Lives Survey and the interim FCA Mission: Our Future Approach to Consumers document.

Both papers highlight the FCA’s clear operational commitment to prioritising the needs of the most vulnerable consumers within financial services.

The Financial Lives Survey, where 13,000 UK adults were asked a combination of 1,500 questions about their personal financial circumstances, provided thought-provoking figures in relation to vulnerability, some of the key highlights are outlined below:

• 50% of UK consumers currently show one or more characteristics of vulnerability – 25.6 million in total
• Those showing characteristics of vulnerability are twice as likely to have used high-cost credit
• 4.1 million people are currently defined as in financial difficulty, as they have failed to pay domestic bills or meet credit commitments in three or more of the last six months

Another recent publication where vulnerability is at the forefront of the FCA’s thinking is the Our Future Approach to Consumers document. The paper builds on the FCA’s 2017/18 business plan and mission, where the commitment to treating vulnerable customers fairly and offering open and inclusive financial services is core the regulators mindset. The ‘Our Future Approach’ document is the first in a series of documents that will explain the FCA’s approach to regulation in more detail and builds on wide ranging research conducted within the market, including the Financial Lives survey.

The document more broadly outlines the FCA’s vision for a functioning financial services marketplace and includes the following four key elements;

• Consumers - ensuring firms enable consumers to select products and services appropriately and that products are sold in a clear, fair and not misleading way
• Products - ensuring firms have products which are of high quality, are good value and offer features that meet consumer needs
• Inclusion - ensuring all members of society are able to access the financial products they need, with the needs of vulnerable customers being considered as standard practice
• Protection - ensuring consumers are appropriately protected from harm, for example, against fraud and scams

 
The FCA’s vulnerability lens

The recent publications also provide a unique insight into the regulator’s definition of vulnerability. The publications show a new definition which the regulator has adopted. The regulator states that somebody should be viewed as vulnerable if, “due to their personal circumstances, they are especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.”

The definition of vulnerability is wide reaching and can impact an individual at any point in their lives. The broadness of the definition will require firms to think outside the box when dealing with potentially vulnerable customers and applying this definition and processes across both front and back office staff.

The FCA further highlights that it will work with firms and other stakeholders in creating an approach to regulation that helps to protect vulnerable customers, whilst still ensuring financial inclusion is maintained and upheld.

Duty of care

The Financial Services Consumer Panel has also pushed for a new duty of care rule to be imposed on regulated financial services firms by the FCA. The proposed rule which has come to light in the recent documentation released by the regulator is in addition to the existing ‘treating customers fairly’ requirement. The rule will require firms to exercise “reasonable skill and care in the provision of services to customers” and further builds on the regulator’s desire for firms to ensure products and services are tailored and meet consumers needs and circumstances.

Considerations for firms

Firms will need to consider how they are addressing the needs of vulnerable customers and ensure they can demonstrate the fair treatment of customers in vulnerable circumstances.

Based on insight gained into customers in vulnerable circumstances through our engagement within the industry, many firms are struggling with corporate definitions, policies, considering the most appropriate operating model(s), and understanding how capable front and back office staff are at identifying and dealing with vulnerability. A clear vulnerability strategy is fundamental.

Firms will likely benefit from reviewing current approaches to understand if there are any customers who might not be receiving the appropriate service level given their circumstances. Key areas for consideration include:

• Identification - having an effective and appropriate approach to identifying, recognising and managing vulnerability is vital in delivering good customer outcomes and meeting regulatory obligations
• Products and servicing - ensuring that the end user understands what they are purchasing, and all communications are clear, fair and not misleading is paramount. Reviewing the FCA’s smarter communications paper and taking note of the suggestions to remove potential communication barriers is a good first step. Ultimately, customers should have a variety of ways to communicate as most appropriate
• Monitoring - reviewing management information relating to vulnerable customers will help firms identify issues with their internal process that maybe causing customer detriment
• Supporting customers - Customers should be able to disclose vulnerabilities and not feel that they will be penalised for their disclosures. Products should be accessible to consumers who may otherwise have difficulty in accessing them and be inclusive

Vulnerability is clearly central to the FCA’s forward-looking agenda. The latest publications highlight the ongoing journey that firms should be taking and highlight where the regulator is likely to expand and develop its approach. Firms have been given the opportunity to review the draft FCA Mission: Our Future Approach to consumers and provide feedback to the regulator by the 5th February 2018.

You can download our latest white paper on the subject, here.