How the new FCA Consumer Duty will help protect vulnerable customers
While the Financial Conduct Authority (FCA) has been working to protect vulnerable customers for many years, the Covid pandemic and subsequent, ongoing effects on household finances have brought the issue into sharper focus.
The introduction of the new Consumer Duty in April 2023 should help to further protect vulnerable customers.
Vulnerable customers are especially susceptible to harm
The FCA defines vulnerable customers as “customers who, due to their personal circumstances, are especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”.
According to the FCA, there are four key drivers of vulnerability:
- Health – including conditions or illnesses that affect a person’s ability to undertake daily tasks. This could include physical and mental health issues.
- Life events – such as bereavement, a loss of employment, and relationship breakdown.
- Resilience – a customer’s ability to withstand financial or emotional shocks. A lack of resilience could be caused by inconsistent income, high level of debt, or low savings.
- Capability – consumer’s level of financial knowledge and confidence in managing money.
The FCA’s financial life survey indicated that there were 24 million adults showing at least one characteristic of vulnerability in 2020.
While this is a drop from the 26 million recorded in 2017, it still represents 46% of UK adults. Yet the same study showed that 86% of UK adults don’t consider themselves to be vulnerable.
Covid exacerbated consumer problems
While not the only driver, the Covid pandemic has highlighted some of the poor outcomes that consumers were experiencing.
For example, many SME businesses purchased Business Interruption insurance in the belief that they provided protection from them having to close, only to discover – too late – that their insurers didn’t cover specific aspects of the pandemic, leaving them unable to make claims.
In this instance, business customers had paid a premium which, at the point of claiming, did not offer the utility expected.
The FCA’s Consumer Duty aims to prevent situations like this from happening.
The pandemic has also created significantly more vulnerable customers, highlighting just how precarious many consumers are when it comes to financial resilience.
This clearly requires a need to offer them a greater degree of protection.
What this means for advice firms
To meet the FCA’s expectations in relation to protecting vulnerable customers, firms will need to understand how they can generate comparable outcomes, regardless of how customers choose to interact.
To meet requirements of the new Consumer Duty, you should ensure you’ve considered the following measures…
Have a deeper understanding of who you are communicating with
It’s not enough to understand who you are communicating with. You must also have a deeper understanding of the “what” and the “how” of your communications.
The upshot of this could be a time-consuming and potentially confusing excess of communication content. Specific client circumstances or specific vulnerabilities could require different styles of approach and multiple re-drafting.
Be mindful of behavioural biases
The new rules mean firms must also consider the degree to which their communications could, potentially, take advantage of consumers’ behavioural biases, which may result in poor customer outcomes.
To assess the degree to which your communications are having the desired effect and empowering customers to make informed decisions will probably require some testing with retail customers.
The outcome of this is that it’s likely to result in more detailed product literature, disclosure and associated terms and conditions.
The extent of change needed could create a difficulty in striking a balance between setting out the useful features and benefits of the underlying products or services and including everything – including elements that can’t be easily explained – in a way that customers can readily understand them.
Clearly, all this will make it essential for companies to introduce correct governance to provide training and guidance to their employees to help them recognise the drivers of vulnerability, and to make sure these are taken into account when interacting with customers.
Lean on technology to help
FTAdviser has reported that: “Using technology to understand clients’ vulnerability is going to be vital from a compliance perspective once the Financial Conduct Authority’s new Consumer Duty is in place.”
Knowing whether a customer should be classed as vulnerable is a confusing area, and often subjective.
And even when an assessment has been made, it’s likely to change. A customer may move up and down the vulnerability spectrum or may not remain vulnerable.
From a compliance point of view, technology can help firms:
- Put robust questionnaires in place
- Collect data that can help assess vulnerability
- Ensure that questionnaires can be repeated frequently and before any changes are made to a customer’s financial position.
How AdviceBridge can help
Due to the way the platform works, AdviceBridge can help you overcome some of the issues the FCA are trying to address when it comes to vulnerable customers.
The information and reporting that AdviceBridge delivers means you no longer need to worry about providing information that is misleading or difficult for consumers to understand.
Because the automatically generated reports and information use clear language, clients’ ability to properly assess products or services that you recommend won’t be hindered.
Robust analysis of client data – including more than 1,000 simulations that take into account various scenarios including tax and risk analysis, saving you time. Using this detailed information, the platform will recommend the best structure across your client’s holdings.
This means that you can rely on AdviceBridge to ensure that recommendations deliver the benefits that consumers reasonably expect and are appropriate for the client’s needs.
Continuous use of the AdviceBridge platform across your client base helps you to record, monitor, test and (where necessary) adapt your business practices and processes on an ongoing basis. This allows you to ensure that you are satisfied that you’re delivering expected outcomes to your clients.
Finally, detailed management information captured and stored within the platform ensures your firm would be ready to provide information and data to the FCA. This robust easy-to-access data will allow you to easily evidence outcomes of your monitoring and testing activity.
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