This article was first published on 06 April 2021 by Thomson Reuters Regulatory Intelligence.
In recent years, the UK’s Financial Conduct Authority (FCA) has often approached financial regulatory issues by looking at the vulnerability of the affected consumers. The FCA’s focus on vulnerable customers is longstanding (and underpinned by its statutory objective of consumer protection), but the issue has come into sharper focus with the ongoing Covid-19 crisis and its impact on household finances.
This article provides an update on the latest developments in this area, including the FCA’s recent guidance for firms on the fair treatment of vulnerable customers, its Financial Lives 2020 Survey and three recent enforcement cases.
The FCA defines vulnerable customers as “customers who, due to their personal circumstances, are especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”. It identifies four key drivers of vulnerability:
- Health (defined broadly to include conditions or illnesses that affect a person’s ability to undertake daily tasks). This could include physical and mental health issues.
- Life events (such as bereavement, a loss of employment and relationship breakdown).
- Resilience (a customer’s ability to withstand financial or emotional shocks, with a lack of resilience potentially being caused by inconsistent income, over-indebtedness or low savings).
- Capability (including the consumer’s level of financial knowledge and confidence in managing money).
The FCA calculates that more than half of the UK’s adults (53%) have characteristics of vulnerability. It will come as no surprise, given its length and severity, that the pandemic has increased this figure and reversed a trend of falling levels of vulnerability (51% in 2017, 46% in February 2020, and 53% in October 2020).
The pandemic’s impact is clearly demonstrated in the FCA’s latest Financial Lives Survey, the regulator’s annual study of the financial health and activity of UK consumers. The survey shows that 20 million adults have seen their financial position worsen due to the pandemic (with 8.5 million over-indebted), that over 25% of employees were furloughed at some point between February and October 2020, and that the number of adults with low financial resilience increased by 35% in the same period. That said, the uneven impact of the pandemic is such that the financial health of the UK’s consumers after the crisis is likely to be varied. For example, it has recently been reported that the pandemic has created over six million “accidental savers” who have retained employment but reduced outgoings as a result of lockdowns.
The FCA’s guidance on vulnerable customers
The FCA describes the protection of vulnerable customers as “a key focus”; it wants to ensure that firms treat them fairly and that they experience outcomes that are as good as those experienced by customers who are not vulnerable. To help firms achieve this, the FCA suggests that they focus on six areas:
- Understanding customers’ needs: Firms should seek to understand the nature and scale of their customers’ potential vulnerabilities, and the impact of that vulnerability on their financial needs.
- Skills and capability of the firms’ employees: The fair treatment of vulnerable customers should be embedded across the workforce, such as through training. Firms should ensure that employees are able to identify the types of harm vulnerable customers are likely to face. For example, employees that handle sales calls should be able to identify phrases and behaviours that suggest customer vulnerability and then to direct the customer to appropriate resources (such as specialist teams within the firm or third parties).
- Product and service design: Vulnerable customers should be considered at all stages of product and service design (for example, firms should consider the positive and negative impacts of a proposed new product on them).
- Customer service: Customer service processes should enable vulnerable customers to disclose their needs, and firms should be able to respond flexibly (including by making customers aware of the support available).
- Communications: Firms should ensure communications are understandable by all consumers and take into account the needs of vulnerable customers (by providing, for example, a choice of multiple communication channels).
- Monitoring and evaluation: Firms should monitor and evaluate whether they have met the needs of vulnerable customers. This will include producing and reviewing management information on the outcomes being delivered to them.
The FCA’s guidance demonstrates how, over the years, its expectations of firms have been raised and broadened. For example, one of the FCA’s examples of poor practice involves a firm refusing to set a withdrawal limit on a customer’s account in circumstances where the customer had a mental health issue and subsequently had to request food bank vouchers. The FCA also suggests that staff should be on the lookout for shortness of breath, signs of agitation and references to a customer taking medication (which would ordinarily be seen as medical issues rather than those that might concern a bank or insurer).
The FCA’s expectations once a vulnerable customer has been identified
The FCA’s guidance is likely to be welcomed by firms as providing helpful clarification of the indicators of vulnerability. That said, it is likely to remain the case that vulnerability will not always be easy to identify; there is no clear division between vulnerable and “non-vulnerable” customers and the question is likely to be one of degree, involving an element of judgement by firms (and particularly by their sales staff and call handlers).
Once a firm has identified vulnerable customers, the guidance does not direct them to take a particular course of action. Instead, the FCA states more generally that it expects “vulnerable consumers to experience outcomes as good as those for other consumers” and that firms should provide a “level of care that is appropriate given the characteristics of the customers themselves”. Given the nature of vulnerability and the fact that each vulnerable customer will be different, and thus have different needs from its financial services provider, the FCA’s guidance is inevitably flexible and high-level in nature, to cover a wide range of circumstances.
Guidance from recent enforcement decisions
Enforcement relating to the treatment of vulnerable customers was among the FCA’s priorities during 2020, Mark Steward, the FCA’s director of enforcement and market oversight, said recently. Three significant enforcement decisions shed further light on the steps that firms can take to provide good outcomes to vulnerable customers. The cases involved the imposition of significant financial penalties on Moneybarn (£2.7 million*), Lloyds** (£64 million) and Barclays (£26 million) for breaches variously of Principle 3 (systems and controls), Principle 6 (treating customers fairly) and Principle 7 (communications being fair, clear and not misleading). Each case related to the firms’ treatment of customers with mortgages or other loans who were experiencing financial difficulty and whom the FCA considered were vulnerable (for example as a result of poor or non-existent credit histories or past financial difficulties).
In each case, the fact that vulnerable customers were affected led the FCA to increase the financial penalty that it imposed***. In addition to the financial penalties, the relevant firms conducted large and costly redress schemes to compensate the affected customers (Moneybarn: £30 million; Lloyds: £300 million; Barclays: £273 million).
The main weaknesses identified by the FCA in these three cases are summarised below. These weaknesses (which overlap with the FCA’s six areas of focus as identified in its guidance described above) relate not only to the more obvious need to identify vulnerable customers and act flexibly to provide them with appropriate solutions, but also to the broader importance of ensuring that the firms’ control framework and culture assists it to treat these customers fairly. This also demonstrates how readily the scope of an FCA investigation can extend from a discrete issue (in this case relating to the harm suffered by certain vulnerable customers) to a more comprehensive review of a firm’s systems and controls.
- Identifying vulnerable customers: Firms should be able to recognise the indicators of vulnerability to identify vulnerable customers. The three cases referred to above suggest that the FCA sees this as a broad and holistic process, requiring them to investigate their customers’ individual circumstances to obtain sufficient information about them and to “understand” and “explore” the reasons why they might be experiencing financial difficulty. A firm’s understanding should also be tailored to the particular market in which it operates. In the Moneybarn case, for example, a significant number of customers were “non-standard” (that is, had poor or non-existent credit histories or had experienced financial difficulty). The FCA stated that this required “a deeper understanding of customers and their financial circumstances”.
- Keeping records of information about customers’ vulnerability: The FCA expects firms to keep records of customers’ vulnerability, such that subsequent staff who review or interact with them can understand their history and also offer them appropriate solutions. For example, in the Lloyds case, the FCA found that information about the reason customers were in arrears had not been recorded.
- Offering appropriate and flexible solutions for vulnerable customers: Having identified vulnerable customers and made adequate records, firms must offer appropriate and flexible solutions that take into account their circumstances (rather than only inflexible standard options that apply equally for all customers). In these three cases, the firms were criticised for failing to offer appropriate forbearance options and other solutions to clear arrears (which, in the Barclays case, could include suspending or reducing interest or charges, the deferment of payment of arrears, and accepting token or reduced payments, the FCA said). In one example from the Moneybarn case, the FCA criticised the firm for offering only a one-month payment break to a vulnerable customer who was an alcoholic, in rehabilitation and on benefits, and whose mother had contacted the firm to ask for a six-month payment break.
- Communications with customers: The methods by which a firm communicates with customers should also be tailored to their vulnerabilities. For example, the FCA criticised Lloyds for having an automated customer communications system that did not take vulnerability into account. The FCA also criticised Moneybarn for explaining termination options to customers in a manner that failed to reflect the customers’ ability to understand the complexities of the options.
- Sales staff and call handlers (number, experience and expertise, training and supervision, incentives and escalation): The firms’ processes relating to their sales staff was a key theme running through each of these three cases. The FCA variously criticised firms for having insufficient sales staff to manage workload, staff with insufficient levels of experience and expertise, inadequate training on customer vulnerability (both at induction and through refresher sessions) and unclear incentive schemes which, rather than encouraging them to treat customers fairly, risked inappropriately incentivising sales staff. Adequate escalation processes were also emphasised by the FCA; firms should have processes for referring vulnerable customers to supervisors, specialist teams or third parties in circumstances where the call handler lacks the capacity or experience to assist them.
- Monitoring customer interactions and providing management information: Firms should have strong monitoring processes and adequate management information on that monitoring to enable senior management to understand how vulnerable customers are being treated. For example, in the Lloyds case, the FCA noted that errors in the monitoring processes led to cases where failures occurred still being recorded as “fair”. It also stated that monitoring should not consider the fairness of individual customer interactions, but the customer’s treatment as a whole.
- Management, oversight and other processes: Systems and controls are likely to be pivotal to ensuring that vulnerable customers are treated fairly. For example, in the Barclays case, the FCA referred to inconsistencies of approach between different units, insufficient control and oversight of sales staff, lack of clarity within the firm as to the respective responsibilities of different functions, management not having appropriate seniority and experience, and inadequate IT systems.
- Culture: The FCA’s emphasis over recent years on culture in the financial services industry (being the habitual behaviours and mindsets that characterise an organisation) was also evident in the Barclays case. The tangible deficiencies that the FCA referred to in the section of the final notice about culture related to monitoring and incentives. The FCA stressed, however, that Barclays itself had identified that it needed to “change its Collections culture … towards a more customer focused approach”, and that one of the root causes of its failings was its culture (with a lack of emphasis on good customer outcomes and escalation).
Other regulatory action taken to protect vulnerable consumers
The FCA’s guidance is the latest in a series of regulatory interventions designed to assist vulnerable consumers to weather the crisis caused by the pandemic. Most notably, in March 2020 the FCA stated that it expects firms to offer payment deferrals to consumers in financial difficulty (both in respect of mortgages and unsecured consumer credit). In the guidance, which has now been extended to July 2021, the FCA stressed that firms should consider the needs of vulnerable customers. It appears to have had the desired effect, with 17% of mortgage holders and 19% of consumer borrowers benefitting from a payment deferral between March and October 2020.
It is clear from both the FCA’s recent guidance and from these enforcement decisions that vulnerable customers will remain an important aspect of regulatory policy. This is unlikely to change, particularly in the short term given that, as the FCA has highlighted, the pandemic has created more vulnerable customers. Looking further forward, the UK’s uncertain economic outlook and ageing population mean that vulnerable customers will likely remain a significant element of conduct risk and regulatory policy.