Consumer vulnerability has quickly risen up the regulatory agenda (see Eversheds’ earlier article on the FCA’s paper on “Consumer Credit and Consumers in Vulnerable Circumstances”). Whilst there are already FCA Principles, Rules and Guidance in existence, the FCA, keen to broaden understanding and stimulate interest and debate around vulnerability, has recently published Occasional Paper 8 (the ‘Paper’). The Paper also aims to provide practical help and resources to firms in developing and implementing a vulnerability strategy.

The FCA acknowledged that the treatment of vulnerable consumers (particularly in relation to mental health and debt) has improved. However, the Paper concluded that more can still be done to ensure that all consumers receive the appropriate treatment in times of most need. There seems little doubt that in the future, the FCA will focus on vulnerability during its supervisory activities.

Making improvements to the way vulnerable consumers are treated will no doubt have a positive impact on reducing consumer debt and improving customer loyalty and trust. Whilst further change is likely to come at a cost, there should also be reputational benefits for those firms which excel in this area.

Scale of consumer vulnerability in the UK

The FCA found:

  • One in seven adults has literacy skills that are expected of a child aged 11 or below;
  • Just under half of UK adults have a numeracy attainment age of 11 or below;
  • Almost half of adults do not have enough savings to cover an unexpected bill of £300;
  • Over 1.4m people in the UK are aged 85 or over. The number of people over 85 in the UK is predicted to double in the next 20 years and nearly treble in the next 30 years;
  • In any given year, one in four adults will experience at least one mental disorder; and
  • 16% of working age adults have a disability.

Defining vulnerability

There is no single definition of a vulnerable consumer but the FCA applies the following definition:

“A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”.

Whilst there are a number of legal obligations relating to vulnerability in general terms (Equality Act 2010, Mental Capacity Act 2005, and Consumer Protection from Unfair Trading Regulations 2008), the interpretation of vulnerability as a concept varies, as can be seen from the various approaches provided by numerous interest groups in the Paper.

The FCA states that “vulnerability involves the interplay between individual circumstances, situations and market factors”. The FCA warns against a fixed, oversimplified and inflexible definition of a vulnerable consumer as vulnerability can be temporary, sporadic or permanent in nature. It is a fluid state that needs a flexible, tailored response from firms.

The FCA proposes using a risk factor approach to assess vulnerability including issues such as bereavement, illness diagnosis, and low income amongst others, which could be considered risk factors. Ultimately, firms must be aware of their responsibilities to treat customers fairly (TCF), and so many firms are working to incorporate vulnerability into their TCF programmes.

It is important to note that whilst a consumer may not be vulnerable at the outset, circumstances may occur which make the consumer vulnerable. It is the firms’ identification of this and the response which is critical.

The challenges

1. Interaction with vulnerable consumers

The FCA highlighted concern about many areas from policy making to implementation, the availability of products and the systems used by staff. Firms' interactions with vulnerable customers were highlighted as a key concern. The FCA described a policy/practice gap at firms, where policies and procedures may not be properly used by or even known to frontline staff and as a result, customers are not always treated in line with those policies and procedures.

Interaction includes online, telephone and face to face experiences. Different mediums of communication present different difficulties for vulnerable consumers:

  • The emergence of internet banking is a great help to many, but alienates some vulnerable consumers who may find their financial institution has fewer local branches;
  • Automated telephone messages whose menus do not allow for those whose circumstances do not fit any of the options also discourages vulnerable consumers from engaging with the financial institution; and
  • Face to face interactions are often the best method of communication for vulnerable consumers but only where the customer facing staff have received appropriate training.

Where consumers do not feel that they are receiving an appropriate level of service, they may feel compelled to use more high risk or high cost options.

2. Disclosure and data protection

Once information has been disclosed to a financial services provider that may indicate that a customer is vulnerable, it is essential that this information is recorded appropriately to ensure compliance with data protection legislation.

Properly recording and processing this information will also ensure that the customer does not have to keep repeating the information. Bereavement, temporary delegation and power of attorney issues were cited as examples where this is a particular problem. Customers need to be able to trust and have the confidence to disclose sensitive information, in the comfort that it will be dealt with appropriately.

3. Suitability and complexity

The FCA criticises complex products and confusing and lengthy communications. It also points to a lack of products and within that range of products there are few which are suitable for non-standard customers in non-standard circumstances. Firms need to be mindful that a financial product may have been appropriate when it was sold, but over time, should that customer become vulnerable for any reason, that product may no longer be suitable.

The FCA also reported that some consumers are overwhelmed by complex information and can find it hard to distinguish between promotional material and important messages about their products.

4. Fraud and financial abuse

It is clear from the research carried out that strictly following anti-fraud and financial abuse procedures can create a problem in itself. Policies which are too rigid can prevent vulnerable consumers from being treated in a helpful way. However, policies which are too favourable to vulnerable consumers may be open to abuse. The two conflicting requirements need to be balanced to ensure that there is an appropriate level of protection and that signs of potential abuse can be proactively addressed. The FCA recognises that imposing rules could have a negative impact on how the industry responds to issues, however, it is important to strike the right balance between protecting vulnerable consumers from detriment and protecting against fraud and financial abuse.

Seven practical suggestions

  • Firms should implement a clear policy and associated procedures in respect of managing customer outcomes in circumstances where vulnerability has been identified. The policies and procedures should be regularly reviewed to ensure ‘policy gaps’ don’t appear. For example, when the business model or products and services change.
  • Firms should audit their current practice and seek out ways to make improvements. Further monitoring of treatment of vulnerable customers should be incorporated into the firms’ routine monitoring.
  • As customers can move in and out of vulnerability, it is important to conduct ongoing monitoring of customers’ circumstances.
  • At the point of sale (and indeed throughout the relationship with a customer), firms could build in checks to assess each customer’s understanding of the products they have chosen and provide reference points where customers could obtain further information and guidance.
  • Firms could conduct surveys and research with existing customers to understand their needs and how they would like to be treated. Frontline staff should be asked to share their experiences to determine what issues they face and how to improve the firm’s response.
  • Frontline staff do not need to be experts, but they need sufficient training to facilitate a proper conversation, to know where internal expertise lies, and know how and when to refer any particular issue or customer. This should be supported by an efficient process for referring consumers on to specialist teams. Staff should have the ability to be flexible and to make decisions to deal with individual customer circumstances.
  • Firms should offer a choice of communication methods. The FCA has produced a practitioner pack as part of the Paper which provides that vulnerable consumers should be offered, "a choice of ways of communicating … and for these to be designed in an inclusive way so that they are clear, easy to understand and meet your needs." This is likely to be a valuable resource for firms.