The importance the FCA places on protecting vulnerable consumers has become increasingly clear with the recent publication of its Financial Lives and draft FCA Mission: Our Future Approach to Consumers documents. Throughout these documents, as well as in its Business Plan and Mission Statement (both published in April) the FCA emphasises its clear operational commitment to prioritising the needs of the most vulnerable and least resilient consumers.
In a speech which followed the publication of the Business Plan and Mission, Andrew Bailey emphasised that "understanding vulnerability is central to how we make decisions. Consumers in vulnerable circumstances are more susceptible to harm and generally less able to enhance their interests". Prioritising vulnerable and excluded consumers is also one of the three themes in the FCA's strategy for ensuring good outcomes for customers and delivering well-functioning markets set out in its draft Approach to Consumers document.
The FCA's definition of vulnerability is extremely broad. Importantly, vulnerability is not a function of income alone – on the FCA's definition, it can potentially apply to anyone at certain points in their lives. The breadth of this definition will enable the FCA to challenge firms on all aspects of their operations. Firms will therefore need to consider how they can demonstrate, including through MI and documentation, that they are addressing vulnerability in the following areas especially:
- Governance – the Board and senior management must be seen to be proactive in prioritising vulnerability;
- Strategy – developing and implementing a firm-wide strategy on vulnerability. This should be based on and apply a sufficiently broad definition of vulnerability;
- Training – and empowerment of staff, particularly at the front line, to help them identify vulnerable consumers and respond in a considered, flexible and tailored way;
- Systems – ensuring that systems do not exacerbate vulnerability by failing to be inclusive or causing additional distress (e.g. where a customer has to repeat the same issues to different sales or contact centre staff several times);
- Products and communications – ensuring that the product design, review and sales processes give adequate consideration to consumer vulnerability, that products are sufficiently flexible to accommodate a change in a customer's circumstances, and customer communications are clear and easy to understand;
- Monitoring and MI – gathering insightful MI to identify potentially vulnerable consumers, identify the root causes of any issues exacerbating vulnerability and monitor the implementation of the firm's vulnerability strategy; and
- Documentation – adequate documentation of firms' reasoning, the conclusions stemming from these and any actions taken in relation to the measures set out above.
Below, we provide an overview of how the FCA's thinking has evolved, how it defines vulnerability, and some considerations for firms.
The FCA's approach: an evolution underway
From its inception, the FCA announced a commitment to a more intrusive supervision that would challenge firms' business models, strategies and product development. The FCA wants firms to place consumers at the heart of its decision making, and promoting consumer vulnerability is an extension of this concept. It is viewed as a means to prevent the emergence of new industry "scandals", and avoid extreme cases of consumer detriment and the litany of regulatory fines which has defined the recent past.
The FCA's Occasional Paper on Vulnerability (OP/8) published in February 2015 was the first FCA publication to consider this concept. The FCA wanted "vulnerability to be as relevant to firms as conduct", and identified a vulnerable consumer as "someone who, due to their personal circumstance, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care".
Acknowledging that identifying vulnerable consumers is not an easy or prescriptive process, FCA's Financial Lives and Consumer Approach documents extend this to include more transient or intermittent types of vulnerability. Thus, vulnerable consumers are considered by the FCA to be:
- "People who can readily be identified as significantly less able to engage with the market;
- and/or people who would suffer disproportionately if things go wrong"
Since the publication of its original OP, the FCA considers that firms have made progress in tackling the issues faced by vulnerable consumers. However, there are also clear signals in the Consumer Approach document of the FCA intention to take further action to ensure good outcomes for vulnerable consumers, particularly those who are most vulnerable and least resilient.
"We will focus our work on sectors and products which are used by consumers with low resilience....we will also prioritise the most vulnerable and least resilient groups of consumers in our supervisory, enforcement and redress work.....we will also take into account the extent and depth of the harm to vulnerable groups when we consider the amount and type of penalty to impose".
The FCA is also indicates that it "will take the deliberate exploitation of vulnerable or excluded consumers very seriously" and, in responding, will "take the toughest enforcement action available". Firms should consider very carefully whether any aspect of their business model or operations could be viewed in this light, particularly in areas such as charging structures or products that are predicated on customer inertia. Vulnerability also augments the FCA's long-standing emphasis on the fair treatment of customers. Indeed, the FCA considers that the fair treatment of consumers in vulnerable circumstances is central to what "good" looks like in this area.
How is vulnerability defined?
The FCA's approach is wide and far-reaching. Importantly, vulnerability is not defined as a function of income alone or a point in time event, but can change according to a consumer's circumstances. Andrew Bailey has observed that "vulnerability itself changes during any individual's life and in different circumstances, with consumer income being only one factor in assessing vulnerability". In its Financial Lives survey, the FCA provides more detail on the characteristics of potential vulnerability. These are: low financial capability; low financial resilience; having experienced one or more major life events recently; and having a physical or mental health condition.
Although the FCA is clear that its conception of potential vulnerability does not equate to consumers necessarily suffering harm, the Consumer Approach document indicates that it expects firms to pay attention to possible indicators of vulnerability and have policies in place to deal with consumers at greater risk of harm. Examples of cross-sector vulnerability provided in the Business Plan include unaffordable insurance premiums for individuals suffering illness; high cost credit and overdraft charges; interest only mortgage arrears at maturity; and pension scammers.
Furthermore, the Mission document states that the FCA will "prioritise consumers who are unable to shop around over consumers who can shop around and choose not to do so", providing a clear link between vulnerability and the FCA's competition remit.
How should firms respond?
As an issue that touches all areas of a financial services business, consumer vulnerability gives the FCA a wide remit against which to assess firms. Firms need to demonstrate that they are taking the issue seriously and respond through effective governance and MI. This response must be appropriately documented. Boards and senior managers need to be seen to be proactive in prioritising, monitoring and dealing with vulnerability including through deep dive exercises. MI will need to focus explicitly on identifying and monitoring vulnerability.
Examples of FCA expectations include its recent consultation on consumer credit which proposed that a firm "should take into account information" at the time of a creditworthiness assessment "which indicates that the customer is in, or has recently experienced, financial difficulties, or is particularly vulnerable, for example, because of a mental capacity limitation". The consultation notes:
"... we would not necessarily expect a firm to proactively establish whether such factors apply, as this may be disproportionate. However, it should not ignore the relevant information".
The FCA's 2016 findings of financial vulnerability in the mortgage market highlighted, as a model of good practice, how firms identified vulnerable consumers, put in place mitigation strategies, developed communication strategies with customers, and produced MI as part of their analysis of the impact of a potential interest rate rise.
In a similar vein, the FCA's recent Occasional Paper on the Aging Population (OP/31) is intended to help firms identify and understand the specific needs, characteristics and preferences of older consumers and ensure that they proactively identify the vulnerabilities associated with older consumers and act with appropriate levels of care.
Firms should consider undertaking, to a granular degree, "vulnerability mapping" of their businesses and customer bases. The documentation of this is essential. Even where a firm has concluded that vulnerability is being adequately addressed or is not material, we recommend that it documents the reasoning and governance process that led to this conclusion.
The FCA has, so far, remained silent on the issue of vulnerability for wholesale financial services firms. While vulnerability can, not unreasonably, be seen as predominantly a "retail issue", wholesale firms need to consider the extent to which they service retail clients and, if so, whether some of them might be vulnerable. Furthermore, the question of vulnerability could, in the future, conceivably arise in the context of small institutional and non-professional investors, for example charities and voluntary groups. The Asset Management Market Study Final Report, for example, found that some smaller institutional investors (typically pension funds) "find it harder to negotiate with asset managers", although notably it did not explicitly define these clients as "vulnerable".
Vulnerability now represents a fundamental operating principle and priority for the FCA. The FCA is determined to learn from previous episodes of consumer detriment, and views the vulnerability initiative as a vital tool to prevent further such episodes. The concept also establishes a strong link between the FCA's consumer protection, competition and market integrity objectives. The latest publications we highlight above show how FCA's thinking on vulnerability continues to develop and expand. The intention to challenge firms in this area is clear.
Accordingly, and given how widely vulnerability is defined, firms will need to evidence developed thinking, analysis, and tangible actions in this high priority, and high visibility, area of conduct regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.