After postponing several of its consultations to allow both financial services firms and itself to focus on the response to Covid-19, the FCA has now published revised guidance on vulnerable customers. It reaffirms the regulator’s commitment to the fair treatment of vulnerable customers; a matter that has always been relevant but one for which importance has significantly increased because of the direct and indirect impacts of Covid-19.
The 2020 draft guidance does not present many material changes as respondents had generally agreed with the content proposed in 2019. However, two key additions stand out: the introduction of the vulnerability spectrum, and the cost benefit analysis.
According to the FCA, over 24 million adults in the UK display characteristics that fall under at least one of the four vulnerability drivers the FCA identified (health, life events, resilience and capability). Anyone can become vulnerable at any point in their lives and the FCA has expressed that binary or even three-way categorisations (vulnerable, potentially vulnerable and non-vulnerable) are insufficient. Instead, the regulator suggests firms must consider vulnerability as a spectrum. This means that an already vulnerable customer may experience increased vulnerability and therefore move further into the spectrum, or that a customer without vulnerabilities may suddenly become vulnerable for reasons such as bereavement or the loss of a job. Firms must also understand their own roles as customers’ vulnerabilities can be exacerbated or perpetuated by the firm’s action and inaction. As customers move further into the spectrum, the likelihood of harm increases.
This spectrum represents an important change in the way firms are asked to look at their customers, and at the processes they have in place to recognise, record and ultimately support them. First off, firms are no longer being required to consider ‘potential vulnerability’ specifically. Instead, they are being asked to consider how vulnerability manifests, along a spectrum, throughout the customer journey. Although some vulnerabilities may be inherent and potentially recognised at onboarding, many aspects of vulnerability are transient. This means that firms must be able to recognise and record vulnerabilities during all stages of the customer lifecycle. In order to do this, firms must define common vulnerability-scenarios that may be present in their customer base and understand their impact on the customer journey. Only once vulnerability is understood within the firm’s context can strategies and procedures be agreed that ensure customers are being treated fairly in accordance to their needs.
Baringa is working with firms to define their insight driven bespoke “personas”; how vulnerability typically manifests in their customer base. We use these personas to design appropriate treatment strategies that can then be signed off at the right level and given appropriate visibility across the firm. Use cases include:
Training for customer facing staff
Scenario modelling the impact of treatment strategies at a portfolio level
Supporting conversations with the regulator during which Senior Managers (SMFs) can be confident in their approach
Cost Benefit Analysis (CBA)
The FCA surveyed firms in order to establish implementation cost estimates, based on company size, for each of their six guidance areas. Firms with 10,000+ employees are expected to incur implementation costs of £3.3 million, with the largest focus areas being product and service design (30%) and understanding the needs of vulnerable customers (30%).
The below infographic summarises the FCA’s priority areas, the actions firms need to take and the estimated allocation of overall effort.
In their research, the FCA found that 41% of firms had not yet made any modifications of their product range to meet the specific needs of vulnerable customers. In order to comply with the guidance, firms must, as a minimum, analyse their product features and their positive or negative impact on vulnerable customers, whether deliberate or not. Firms should also seek to design products and services that actively aim to reduce the risk of harm for vulnerable customers. For example, several banks have introduced optional blocks on payments to gambling firms to help consumers who would benefit from greater control of their spending on gambling.
To understand the needs of vulnerable customers, firms must not only carry out market research, but also embed the knowledge of the needs of vulnerable customers into internal policies.
In summary, the FCA reviewed guidance and CBA revealed that most firms will have to make significant investments in the coming years in order to embed these requirements in their practices. The regulator advised that they plan to evaluate whether firms have implemented the guidance and outcomes experienced by vulnerable consumers for 2023. With the added pressures of the COVID pandemic creating additional strain on individuals combined with this FCA guidance, we expect to see vulnerability firmly placed in firms’ agendas.
For more Baringa research and thought leadership on the topic, please visit our vulnerable customer webpage, where you can also access Baringa’s online maturity assessment tool. This tool assesses where your company is on the journey to delivering great outcomes for vulnerable customers.
About the authors:
Margarida Ferreira is an Analyst in Baringa's Finance Risk and Compliance practice, and Stephen Humphreys is a Director in Baringa's Finance Risk and Compliance practice.