Since the publication of its original paper on consumer vulnerability in 2015, the FCA has strengthened its approach to consumer vulnerability. The FCA considers that half of the UK population displays characteristics of potential vulnerability based on its definition. The protection of vulnerable customers - already a core FCA priority - has now been thoroughly embedded into its programme of thematic work and day-to-day supervision. Through its recent Guidance Consultation 19/3, the FCA seeks to provide greater clarity for firms regarding its expectations as to the fair treatment of vulnerable customers and practical guidance on translating those expectations into action.
Crucially, the FCA expects firms to embed the fair treatment of vulnerable customers into their culture at all levels and has made explicit its intention to hold firms to account where they are judged not to be doing enough to meet the expectations set out in the Guidance.
Despite the progress that it has seen, the FCA wants further improvements in the way that vulnerable customers are treated. To this end, and in response to requests for greater clarity from firms, the Guidance provides practical examples of how firms could meet the FCA’s expectations including a number of case-studies of good and poor practice. The following areas are covered:
- Understanding the needs of vulnerable customers;
- Skills and capability of staff;
- Product and service design;
- Customer service;
- Communications; and
- Monitoring and evaluation.
Based on our experience of working with firms, this blog focuses on some of the key issues and challenges arising for firms from the FCA’s Guidance.
Embedding consideration of vulnerable customers into the firm’s culture
“The draft Guidance aims to make it clear to firms what they should do to embed doing the right thing for vulnerable customers into their culture, so that it permeates across the organisation from the Board through to frontline staff”
A key FCA expectation is that firms ensure that their culture focuses staff, products, services and processes on the fair treatment of vulnerable customers and that the outcomes achieved for vulnerable customers “are at least as good as those of other consumers”.
To demonstrate that they have thoroughly embedded consideration of vulnerable customers into their culture, firms will need to demonstrate that:
- they have an understanding of the needs of their vulnerable customers and of the harm that can arise if these needs are not met;
- staff have the necessary knowledge, skills and capability to meet those needs; and
- their understanding and analysis of vulnerability has been translated into practical action at key points of the product lifecycle and customer journey, including product and service design, customer service and communications.
In our experience, some firms have, to date, focused their efforts on improving outcomes for vulnerable customers in front line interactions only and have either not yet incorporated consideration of vulnerability more widely, or done so only to a limited extent. Going forward, we expect increased supervisory scrutiny of how firms have applied the FCA’s Guidance throughout the whole organisation starting with the Board and Senior Managers.
We set out below some considerations for firms when seeking to integrate their approach to vulnerable customers throughout the product lifecycle:
Figure 1: Integrating approach to vulnerable customers in the product lifecycle
“If firms do not understand the potential needs of the vulnerable customers in their target market or customer base, it may result in gaps in the provision of suitable services and products”
Fundamental to the FCA’s Guidance is the expectation that firms take a proactive approach to understanding the nature and extent of vulnerability in their target market and customer base. Whist this is not necessarily a new expectation, in our experience not all firms have begun to analyse their target markets and customer base to the degree of granularity expected by the FCA. In particular, the FCA expects firms to understand whether specific vulnerabilities are more prevalent in their target markets or whether their customers have a heightened exposure to certain drivers of vulnerability.
The FCA has, likely in response to the challenge that not everyone with vulnerable characteristics will need additional or immediate support, set out a distinction between actual and potential vulnerabilities. In practice, we expect firms will need to demonstrate how they identify and address the needs of both groups, recognising that customers who are actually vulnerable are more likely to require immediate adaptations whilst potentially vulnerable customers may be more at risk of harm from poor market practices or treatment.
Use of data
The FCA has recognised that firms are concerned about the challenges data protection legislation, and in particular GDPR, creates in terms of recording and sharing data on vulnerable customers.
In response to these concerns, the FCA has sought to provide some clarity around data protection provisions that may be helpful for firms. However, we do not think that this will eliminate the need for firms to exercise judgement on what they are permitted to do under the relevant legislation. Decisions will inevitably be based on risk-appetite as well as a firm’s own interpretation of the legislation, creating a continuing risk of some inconsistency in approach across financial services.
Management Information and analysis
The FCA is very clear in the draft Guidance that a one-off review process is not going to meet expectations under the Principles, and that a process of ongoing monitoring is required. As such, it will expect:
- monitoring, including management information, that provides firms with a continuous view on whether the fair treatment of vulnerable customers is embedded, and how the firm’s actions affect outcomes for vulnerable customers; and
- quality assurance throughout the customer journey.
For firms with larger customer bases, or with a customer base more prone to vulnerabilities, more proactive analysis should be considered. In our view, data on customer cohorts (such as death claims, policies with third party arrangements, or cohorts with different levels of debt) could all be used as indicators of potential vulnerability. Cohort data could then be analysed for outcome trends compared against firms’ wider customer bases.
The FCA will expect firms’ digital journeys to consider and address the needs of vulnerable customers in the same way as traditional distribution arrangements. It will be particularly concerned about the risk that digital distribution is excluding or penalising vulnerable consumers and about any failure of digital channels to identify and meet the needs vulnerable customers.
In our experience, firms are often uncertain how to address the needs of vulnerable customers via digital channels. Key areas to focus on include:
- considering vulnerable customers at the outset when designing and delivering a digital product or journey;
- considering how technology can be used to identify vulnerable customers and facilitate improved disclosure and recording of their needs;
- considering incorporating processes for third party access to assist the consumer into the digital journey;
- signposting to other relevant organisations such as charities or other third sector organisations, as appropriate;
- including digital opt-outs and exits routes to other channels; and
- appropriate testing of digital channel development, with access and vulnerability in mind (for example, testing with access software such as screen readers and understanding how graphics may affect the ability of certain groups to read information).
Considerations for firms
Whilst there is a two-stage consultation process, firms should bear in mind that, through this guidance, the FCA is setting out its view on what the Principles for Business require of firms and that the obligations highlighted in the guidance are not new and already apply. Accordingly, firms will want to consider what steps they need to take now, rather than waiting for the finalised Guidance, especially if they are likely to have significant gaps in their approach.
Firms should therefore consider:
- undertaking a gap analysis of practices across their organisation against the FCA Guidance to identify where enhancements are required;
- developing a plan to deliver those enhancements; prioritising the gaps that create the biggest risk to vulnerable customer outcomes, recognising that these may not always sit in front-line teams;
- being prepared to discuss any gaps, together with plans to address these, with the FCA.
The FCA has made it clear that it will be holding firms to account on vulnerable customers. As such, focussed and challenging supervisory discussions in this area should be expected, with a particular focus on whether and how the board and senior management are monitoring vulnerable customer outcomes and ensuring their needs are met, and on the MI they are receiving to help them do this.