"The underlying message in light of last week’s announcement from the FCA, is that firms must not approach this half-heartedly."
The impact of the cost of living
Rarely does the FCA act so urgently. That being said, it's plain to see what’s prompted this change. Last week’s communications from the FCA feature discussion of how more than 80% of adults reported an increase in their cost of living during March 2022, and how 27% of the population is suffering with low financial resilience. Certainly the FCA’s direction of travel on vulnerable customers has been clear for some time, but the pressure caused by current inflation and the so called ‘cost-of-living crisis’ has brought the urgency of implementation into sharp focus due to last week’s FCA communications to lenders.
Systematic, consistent and fast
The guidance has made clear that identifying and supporting vulnerable customers’ needs to be as systematic as it is consistent, and it needs to be done quickly, too. But, of course, even identifying who is at risk in the first place can be difficult. And then there’s the question of the various processes that need to be in place. Which systems should you choose? How can you ensure that every eventuality is covered? How can one ensure consistency?
In the first instance, a simple three-step framework can help shape the different approaches advisers should consider:
1) Identify, link and support
The FCA describes a vulnerable person as somebody whose circumstances make them “especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care”.
It also outlines four key drivers for advisers to consider:
• Health – conditions or illnesses that affect the ability to carry out day-to-day tasks.
• Life events – such as bereavement, relationship breakdown or redundancy.
• Resilience – low ability to withstand financial or emotional shocks.
• Capability – low knowledge of financial matters or low confidence in managing money.
These signs can be difficult to spot, especially when clients either hide their situation or don’t believe they’re financially vulnerable. This is particularly true for the more cognitive based triggers, resilience and capability. Likewise, what one adviser deems vulnerable might not be considered the same by another. But with the right tech and processes, a truly objective process can be achieved.
2) Understand the impact of the driver
Once financial vulnerability has been identified, the second step is to understand the link between the driver and the creation of a vulnerability. What’s imperative here is assessing the extent to which each driver impacts that person’s circumstances. In other words: which factors are making a tangible difference? The impact of the driver (or drivers) needs to be fully understood for the appropriate support to be adopted. What we have seen through the assessments carried out on our platform is that there are often a number of impacts to a single driver. For example, where bereavement is the driver, we are seeing multiple vulnerabilities identified, and these vary from person to person. What is clear is that one approach to bereavement for example, is unlikely to offer the right levels of support another client. It is really important to understand how the circumstance is affecting the individual and then support accordingly.
The third stage is to identify the optimum response pathway.
First, they should ask: what is the temporal nature of the situation? A customer might only be at risk temporarily – perhaps they’re between jobs or have suffered a breakdown of their relationship. Others might be permanently at risk (for example, suffering from a terminal injury or condition), while some could be experiencing fluctuating fortunes dependant on a wide range of circumstances.
Next, they will need to determine where the vulnerability is rooted. The factors could be individual (personal health circumstances), environmental (redundancy), institutional (use of jargon, selective communication channels) or even a mixture of all of these.
Once advisers understand the situation, they can identify appropriate responses. For example, if a financial adviser discovers that their customer is hard of hearing, and a company they deal with only communicates with them over the phone, it’s likely they’re dealing with a permanent presentation that stems from an institutional root. The solution would be to change the way the institution engages with the customer – email or live chat, for instance, would be an easier way to communicate. This is just one of countless potential scenarios, of course, and there are many many more.
No sticking plasters here
The underlying message in light of last week’s announcement from the FCA, is that firms must not approach this half-heartedly. There’s no scope to simply paper over the cracks here. A long-term solution is required; and indeed, one that will hold up to regulatory scrutiny.
There’s no doubt about it, identifying vulnerable customers can be daunting for firms. But help is available. Technologically driven assessment tools exist that can help to identify financially vulnerable customers and get the right systems in place to ensure consistency across a whole client base. For instance, our platform at Comentis combines clinical expertise from mental health experts and psychologists with hard data, to present a fact-based assessment of individuals and their circumstances, as well as how a vulnerable circumstance is likely to impact the client, removing the subjectivity from the process. Given what we have discussed above, arguably clinical led solutions are the only way to assure that all the vulnerability drivers are in scope, thereby giving firms reassurance that their systems and controls will be adequate to meet the scrutiny of regulatory requirements.
In the long run, this process will benefit everyone; clients and firms alike. If you’re struggling, or if you know that you need to bring in additional expertise, don’t delay. This needs to be done properly – there are to be no sticking plasters here.