Ensuring that financial services firms do the right thing by vulnerable clients is high up on the FCA’s agenda, but identifying which customers might need extra support and adapting a service accordingly presents a challenge for advisers.
Based on its Financial Lives Survey, the watchdog says that as many as 50 per cent of UK adults, or 25.6 million people, “display one or more characteristics of being potentially vulnerable”. Such customers, it warns, may be more likely to experience harm. “In many cases, this risk of harm may not develop into actual harm. But if it does, the impact on vulnerable consumers is likely to be greater than for other consumers,” it says.
The FCA admits its definition of what it means to be vulnerable is “intentionally broad”. The guidance it published last year sets out four main drivers of vulnerability, ranging from temporary to permanent factors. These are health – mental or physical conditions that affect the ability to carry out day-to-day tasks; major life events – such as bereavement or relationship breakdown; resilience – a low ability to withstand financial and emotional shocks; and finally, capability – low knowledge or confidence in financial matters.
Health conditions may be acute or chronic, fluctuating or deteriorating, meaning that an adviser has to consider how the client’s degree of vulnerability changes over time. Similarly, the impact of life events on a client’s personal situation could be transient or ongoing – for example, being made redundant could create a short-term vulnerability, but becoming a carer for a partner or family member could put a client under long-term pressure. Factors affecting a client’s financial resilience could include low or erratic income, over-indebtedness or a lack of savings. Meanwhile, capability might be impacted by low levels of literacy and numeracy, poor English or learning difficulties.
Embedded into culture
These are huge issues for the industry to grapple with and until the FCA publishes its final guidance on the subject – which is due imminently – firms will not know the full extent of their obligations. However, the regulator says it does not wish to be prescriptive but wants firms to “embed doing the right thing for vulnerable consumers into their culture, so it permeates across the organisation from the board through to frontline staff”.
There is a difficult balance to be struck between protecting vulnerable customers and creating a market that unintentionally excludes them, warns HL Partnership’s compliance director Gavin Earnshaw. He says: “The FCA has had to be careful because it does not want to create barriers to the market for people with vulnerable situations. If you over-regulate, it will scare firms away and they will not want to deal with vulnerable customers for fear of getting it wrong and being sued.
“The FCA is on a tricky path, but it is doing its best. It has made it quite clear that it wants advisers to understand the needs of vulnerable customers, to be equipped with the skills to identify when they are talking to a vulnerable customer and to develop practical solutions. But it will be down to interpretation by individual firms as to what they do.”
Good brokers pride themselves on building strong relationships with their clients and most will already be identifying vulnerabilities during their fact-finding process, Earnshaw argues. But there is always scope for improvement, he says. This means doing thorough research into subjects such as mental illness.
The need to know
Earnshaw points to a joint publication by the Money Advice Trust and the Money and Mental Health Policy Institute called The Need To Know, which is freely available on both charities’ websites and outlines how different conditions might impact a client’s ability to function or manage money. People with bipolar disorder, for example are prone to compulsive spending, while those who suffer from anxiety might find speaking on the telephone intimidating. The MMHPI has also published a set of accessible standards that it wants financial services firms and retailers to adopt, which include giving customers a choice of communication channels according to their individual needs.
However, Earnshaw is concerned that the FCA’s moves to make it easier for firms to offer execution-only sales are at odds with its focus on safeguarding consumers.
He says: “On the one hand the FCA is building a framework that is protecting vulnerable customers, but on the other hand you have got this drive to fintech and execution-only. The Mortgage Market Study, the repealing of advice and the development of execution-only sales through internet channels – it really does worry me.
“Vulnerable customers are particularly exposed when they are buying easy credit, personal loans, credit cards, short-term finance – you can literally do it in five minutes without speaking to anybody. So if the mortgage world is going down that route, it does worry me that it will be at the expense of vulnerable customers.
“A skilled, qualified, experienced practitioner who is able to build a rapport with a customer can identify the vulnerability, but I don’t think there is any artificial intelligence yet that is part of an execution-only mortgage process which can do that.”
Vulnerability can impact borrowers at either end of the mortgage lifecycle and at any point in between. At one end of the scale you have first-time buyers who lack experience and expertise, borrowers with a thin credit file and those with a patchy history with previous missed payments. At the other end of the scale you have older borrowers, interest-only customers heading into retirement with no repayment vehicle and customers with deteriorating mental capacity due to conditions such as dementia. In many of these situations clients may find it beneficial to bring a chaperone to their meetings with an adviser, Earnshaw suggests.
Just Mortgages compliance officer Liz Yates agrees, but her firm has also witnessed a situation where the person accompanying a client to a meeting was itself a red flag.
“We had a lady come in to see us with her ex-husband for a buy-to-let. It was not comfortable and the adviser felt that she might be under some kind of duress. She was the one who was going to be putting down the deposit, but they were arguing and something didn’t seem right.”
Yates says the adviser later managed to speak to the woman over the phone when she was alone and determined she was being coerced into the transaction so the broker stopped the process.
Sesame Bankhall head of group compliance Carl Wallis says it may help firms to consider segmenting their client base in order to identify areas where vulnerability is more likely to occur.
“Vulnerable customers to my mind are a subset of the treating customers fairly regime and the industry is very well developed in terms of that concept. This is just a further step in the maturity and development of that regulation. What this guidance might do is ask firms to take a step back and think about their services in a segmented way, identifying whether there are any advice areas where there is a higher likelihood that customers will be vulnerable,” he says.
“Debt consolidation might be a fairly obvious one, or adverse credit where people might have financial pressures. You might have customers who have recently divorced or clients looking at later life lending. It is just about how we deal with those cohorts and adding in an extra depth of thought to adapt services to those particular circumstances.”
Use your intuition
Wallis believes it is important to give staff the freedom to be able to respond intuitively to vulnerable clients’ needs rather than simply laying down the law.
“Because the definition of vulnerability is so broad brush, applying very rigid and stringent policies probably misses the point. If you have a very rigid policy that your frontline staff cannot adapt to a particular situation, I don’t think that is helpful. There needs to be quite a bit of flexibility in the process for it to be effective,” he says.
But as with so many areas of compliance, unfortunately it is not enough to do the right thing; you also have to be able to prove that you have done the right thing, warns Earnshaw.
“As an adviser you should have a mechanism to ensure that you are recording on the file what steps you are taking to identify vulnerabilities and when you have identified them, what steps you are taking to modify your approach to that customer.”
One area in which vulnerabilities may come to light quite naturally is in conversations around protection, since they touch on so many different areas of a customer’s life, from health and relationships to employment, says Earnshaw.
“A good mortgage adviser will be exploring protection and once you start talking about that you are going to be asking personal questions. Quite often these days you will be asking about mental health issues as part of the application process. You also have to ask about sensitive subjects, such as HIV. If you are a skilful practitioner and you have built up trust with a client, there is no reason why they should not tell you about any other vulnerable issues they have.”
Money Advice Trust vulnerability lead consultant Chris Fitch says that lenders have a role to play when it comes to product design.
“Twenty-five years is a popular mortgage length – it is also long enough for most people to experience at least one life event, financial shock or health problem that can put them into serious difficulty,” he says. “Designing mortgages for the real world is therefore key. And the FCA agrees by indicating as part of its vulnerability work that firms may be expected to deal with things that life can throw at us when they design mortgages. If this happens, firms will need to design mortgages with vulnerability firmly in mind, including ‘baking in’ flexible features – like temporary payment holidays – as standard.”
The regulator may be encouraged to see how some lenders have responded proactively to help customers who were made vulnerable by flooding. Natwest, TSB and Saffron Building Society all offered borrowers severely impacted by the storms the option of deferring payments for several months. However, these borrowers remain vulnerable to future problems since they may struggle to get affordable insurance, sell or remortgage their homes in the future.
Borrowers in blocks with unsafe cladding are in a similar position, unable to sell or switch to more competitive deals, as are the prisoners still stuck on expensive standard variable rates. Addressing these vulnerabilities which have been created by systemic problems in the housing sector is likely to require cooperation and creative thinking from lenders, regulators and ministers alike.
