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Vulnerable customers; What the Consumer Duty rules mean for both financial services and non-financial service operators and how the rules could develop in the coming years

Vulnerable customers; What the Consumer Duty rules mean for both financial services and non-financial service operators and how the rules could develop in the coming years

With the Consumer Duty deadline having come into force on 31st July 2023, Jonathan Barrett, CEO and Co-Founder at Comentis, clarifies what the rules mean for organisations when it comes to identifying and assessing vulnerable customers. He also explains how the rules will likely develop over the coming years; forewarning industry professionals that this is just the starting pistol, marking the beginning of a broader conversation on vulnerability.

Customer vulnerability is the thread that runs through all aspects of the Consumer Duty. And it’s not just financial services institutions that need to be all over the new rules – in fact, any business which offers credit to pay for goods or services is going to be impacted by this.

Ultimately whether a consumer is buying a car, purchasing a pair of glasses, or buying a new sofa, if that consumer decides to take a credit agreement, the firm that the consumer purchases from will likely* need to understand whether that specific customer is vulnerable under the FCA definition.

The FCA defines vulnerability 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. Firms should think about vulnerability as a spectrum of risk. All customers are at risk of becoming vulnerable and this risk is increased by characteristics of vulnerability related to 4 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.”

So, as the above makes clear, financial vulnerability isn’t just about how much money that person has access to, or indeed whether that person can afford the product they are trying to purchase. It is so much more than this. Even just a change in circumstance, whether it be a divorce, a new baby, an illness or a bereavement, could easily leave someone at risk from vulnerability.

Vulnerability identification is a very complex process and poses a massive challenge for industries that have previously passed on such responsibility to a credit provider to take care of. Consumer Duty now needs to be adopted across the whole distribution chain. And of course, given many of these purchases may well be made online, there is an added complexity when it comes to vulnerability identification without any contact with the customer in question.

Thinking long term.

It’s important to remember that, just like many of the firms who were rushing to put Consumer Duty plans in place by the end of July, the FCA is also new to monitoring vulnerability outcomes. And while those who do nothing will certainly face repercussions after the July deadline, the purpose of Consumer Duty isn’t to punish firms that fall short. Rather what the FCA wants is for vulnerability to be taken seriously, in a way that one could argue it previously hasn’t. The regulator wants to see that the foundations are in place, ready for us to build on as we develop our understanding.

And this idea of long-term development is crucial when trying to determine where we go next with Consumer Duty. Because supporting vulnerable customers is something we’ll all need to work on and improve at over time. So, what the FCA wants to see now isn’t necessarily that everyone has every single base undeniably covered. What it really wants is to see that we’re all in the race to ensure good outcomes.

This is just the starting pistol.

With this in mind, the end of July is far from the finish line. Instead, it should be seen as the firing of a starting pistol, marking the beginning of a broader conversation, and understanding on vulnerability.

While some might have been looking forward to putting Consumer Duty behind them this summer, the reality is that the topic of vulnerability is here to stay. Over time, and as we develop our understanding, the outcomes we deliver for vulnerable customers will start to gradually improve. But we shouldn’t expect an overnight transformation. In all likelihood we’ll be in escalation for years.

As such, and given Consumer Duty is really about continuous improvement, the goal should be for firms to look at the measures they’ve put in place so far and ask how they can go a step further.

The importance of data

For some, providing staff with vulnerability training might seem like the most logical way forward. But while training is certainly important, it isn’t the final piece of the puzzle. In reality, a continuous process of implement, test, refine and learn is required. We need to assess the data gathered so far and interrogate it for ways we can improve going forward.

The best place to start is with the firm’s own data. Even with purely internal data, an organisation will be able to see what’s missing and refine. Often the right data points around vulnerability can be missing – a firm can’t just use transactional or complaints data for example.

However, those who are most successful in their vulnerability processes will also have an external view. So many firms are new to this process of collecting vulnerability data. If there are thousands trying to solve the same problem, and to make the same improvements, it makes all the sense in the world to look at other firms – even other industries – and try to benefit from their learnings.

In terms of getting ahead of these developments, ultimately whether it’s their own data or from across the industry – a third-party specialist with a technology-driven assessment tool can help to accelerate the process, removing bias and subjectivity from the process, and ensuring consistency across a whole client base. By combining clinical expertise with hard data, they’re able to reassure firms that their systems and controls are affecting the change the regulator is looking for.

*the only exception to this is if the selling firm is an IAR. In which case it will not be their responsibility, but that of the AR or broker.

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