The Financial Conduct Authority (FCA) focuses on ensuring consumers have an appropriate level of protection. Vulnerable customers are no exception. The general principle of the FCA's consumer protection objective is that consumers take responsibility for their decisions.
However, the FCA is mindful that some consumers have a limited ability or willingness to make decisions, putting them at a greater risk of harm. The FCA has outlined guidance for regulated firms to treat vulnerable customers fairly.
Defining & understanding vulnerable customers
- How does the FCA define vulnerable customers?
- Why does customer vulnerability matter?
- How does vulnerability affect firms?
- What are the needs of vulnerable customers?
- How do firms support vulnerable customers?
1. How does the FCA define vulnerable customers?
Since Occasional Paper No 8 (FCA OP8) on consumer vulnerability in early 2015, the FCA has been dedicated to addressing vulnerability. The regulator has worked with other bodies in the financial services industry and the non-profit sector to establish a definition of a vulnerable customer.
"A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care."
The FCA advises firms to consider vulnerability as a spectrum of risks where all customers are at risk of becoming vulnerable. This risk increases with the presence of vulnerability characteristics. These characteristics relate to four key drivers of vulnerability:
- Health - any condition or illness that affects the ability to carry out daily tasks
- Life events - these events include bereavement, job loss or retirement
- Resilence - reduced ability to withstand financial or emotional shock
- Capability - low confidence and confidence in managing money/financial matters. This driver includes low capability in areas such as literacy and numeracy.
2. Why does customer vulnerability matter?
Vulnerability plays a significant role in ensuring the fair treatment of all customers, as vulnerable customers may have different needs and behavioural biases that negatively affect their decision-making.
Understanding how to identify vulnerable customers allows for the appropriate response to meeting their needs and implementing processes to support them. This knowledge allows firms to develop a culture that aligns with the principles of protecting vulnerable customers. In line with this, firms can train employees to handle vulnerable customers.
3. How does vulnerability affect firms?
The FCA's Principles of Business state that all customers should be treated fairly, and this expectation goes a step further with vulnerable customers.
When customers are in vulnerable circumstances, their ability to engage in financial services can be affected. A firm's attitude towards such customers could be detrimental as they may be less able to represent their interests.
The FCA aims to protect the interests of vulnerable customers, and they address customers in vulnerable circumstances in Focus 2: Setting & Testing Higher Standards of the FCA Business Plan for 2022/23. It's a firm's responsibility to meet the FCA's expectations and not to take advantage of these individuals.
A Financial Lives Survey revealed that 40% of individuals with health problems lack trust in financial services firms, indicating that investing in vulnerability would improve customer trust and loyalty. It also gives firms a competitive advantage and ensures they avoid fines for the mistreatment of vulnerable customers.
4. What are the needs of vulnerable customers?
Understanding vulnerable customers' needs help firms meet them and provide fair treatment according to these needs. The needs of vulnerable customers in a firm's target market will vary depending on several factors, including the driver of vulnerability.
The type of harm or disadvantage a customer is vulnerable to and how this could affect their customer experience will help firms identify the specific needs of a vulnerable customer. Some examples of harm and disadvantages a customer could be susceptible to include:
- heightened stress levels
- increasing time pressures due to additional responsibilities
- increasing pre-occupation (their brain is 'elsewhere')
- processing power and ability decreasing due to competing pressures
- lack of perspective, especially when experiencing something for the first time
- changing attitudes towards taking risks
By understanding these harms, firms can identify the needs of these customers. For example, poor decision-making due to heightened stress levels could be exacerbated by information asymmetry. In response, firms should meet the customer's need for accessible information to make an informed decision.
If firms fail to meet this need, the combined effect of information asymmetry and behavioural distortions can result in vulnerable customers buying unsuitable or poor-value financial products and services.
5. How do firms support vulnerable customers?
The FCA has published guidance, FG21/1, for regulated firms on dealing with vulnerable customers. The finalised guide outlines actions firms should take to treat vulnerable customers fairly and some practical examples. Firms can also consult responses to the most frequently asked questions regarding vulnerable customers.
Policies and procedures give employees a reference point for knowing a firm's expectations. Creating and implementing a vulnerable customer policy is another way firms can ensure the most vulnerable are treated fairly.
This policy allows firms to outline how they handle vulnerable customers clearly and concisely. A vulnerable customer policy should be regularly reviewed and communicated to all staff.
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