The FCA has published final guidance (the "Guidance") clarifying its expectations of firms on the fair treatment of vulnerable customers, as well as a Feedback Statement to its July 2020 consultation on the guidance (Guidance for firms on the fair treatment of vulnerable customers (FG21/1)).
The Guidance sets out the FCA definition of vulnerability:
"someone who, due to their personal circumstances is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care"
Vulnerable customers may be at greater risk of harm, especially when things go wrong. In its Feedback Statement, the FCA acknowledges that the COVID-19 pandemic has had a particular impact on increasing the vulnerability of certain customers. Individuals have suffered life events such as bereavement and job losses which can push them further along the "spectrum of vulnerability", a new concept the FCA has adopted to make clear the fluidity between non-vulnerable customers and vulnerable customers. The FCA sees vulnerability as a spectrum, on which customers can move up and down, dependent on their circumstances.
The FCA wants to encourage improvements in the way firms treat vulnerable consumers and to change firms’ actions and behaviour, primarily by requiring the consideration of vulnerable customers to be embedded in the product design process and by requiring firms to adopt a flexible approach to vulnerability which aligns with customers' placement on the vulnerability spectrum, rather than having a catch-all approach for any customer categorised as "vulnerable".
Key actions for firms
Understanding the needs of vulnerable consumers
Vulnerability should now be understood by firms as a spectrum, and firms should understand that all customers are at risk of becoming vulnerable. However, the FCA identifies that this risk is increased by characteristics of vulnerability related to four key drivers:
- Health – health conditions or illnesses that affect ability to carry out day-to-day tasks.
- Life events – life events such as bereavement, job loss or relationship breakdown.
- Resilience – low ability to withstand financial or emotional shocks.
- Capability – low knowledge of financial matters or low confidence in managing money (financial capability). Low capability in other relevant areas such as literacy, or digital skills.
On one side of the spectrum, consumers are less likely to be vulnerable and so face a relatively lower risk of harm. On the other side of the spectrum are those more likely to have different needs, for example, consumers with multiple overlapping characteristics of vulnerability. Firms should respond to the needs of all customers along this spectrum. The Guidance also makes clear that the spectrum is fluid, and that firms should constantly assess where a client sits on the spectrum and whether, as a consequence, their treatment of that customer should change.
A. Training - embedding the fair treatment of vulnerable consumers across the workforce
Firms should ensure that the fair treatment of vulnerable customers is perpetuated throughout the staff of the firm by providing training to ensure staff have appropriate skills and capability, ensuring senior leaders champion a culture which prioritises fair treatment of vulnerable customers, and ensuring that staff understand the potential needs of vulnerable customers in their target markets.
B. Product and service design - designing sales processes that meet consumers’ needs
The Guidance makes clear that the treatment of vulnerable customers is not an issue limited to front-office, customer facing staff. Firms should take vulnerable consumers into account at all stages of the product and service design process, including idea generation, development, testing, launch and review, to ensure products and services meet their needs.
C. Front line - customer service and communications
The Guidance identifies that communications and customer service are a key part of ensuring that vulnerable customers are treated fairly. A key aspect of the FCA's recommended is approach is flexibility: the Guidance states that firm's customer service should respond flexibly to the needs of vulnerable customers, including the use of multiple channels of communications and the use of third-party representatives (where required).
Firms should have in place systems and processes to note and retrieve information about customers' needs and requirements. The FCA acknowledges some firms' concerns around the collection and storage of such data (due to its highly sensitive nature) but nevertheless recommends that it should be done, albeit at all times in accordance with relevant data protection law.
D. Monitoring and evaluation – compliance monitoring and governance oversight
The FCA considers that firms should implement appropriate processes to evaluate where they have failed to meet the needs of vulnerable consumers, in order that they can make improvements. This should include the regular production and review of management information, appropriate to the nature of their business, on the outcomes they are delivering for vulnerable consumers.
Application
The FCA states that although the Guidance applies to firms’ dealings with retail customers who are natural persons, firms should remember that its Principles of Businesses, including the obligation to treat customers fairly, extend to all customers. The FCA states that the key basis underpinning the requirement for firms to take particular care in the treatment of vulnerable consumers is Principle 6 of the FCA's Principles for Businesses (Customers’ interests: A firm must pay due regard to the interests of its customers and treat them fairly).
What should firms do next?
The publication of the Guidance is a good catalyst for firms to review their existing policies and procedures in relation to vulnerable customers. The Guidance sets out some good and bad practices and firms should gap analyse their existing systems and processes against the FCA's expectations. Where any divergence exists firms should look at what measures need to be put in place to ensure that the FCA's expectations are met with respect to the firms' approach to vulnerable customers. This is likely to be a key focus for supervisors over the next few months, particularly in light of the effect of the pandemic.
Co-authors: Emma Tran, Associate and Henry Glasford, Associate
