Raising the vulnerability bar - ensuring good outcomes for consumers

Creating processes enables firms to achieve operational efficiency and supports risk management. It provides a common knowledge base, common ways of working and assurance that things are done in a certain way. For many firms within financial services, and particularly those that have accelerated digital transformation in the wake of the pandemic, too much process can however create a one size fits all approach, which impacts a firm’s ability to ensure good outcomes for customers.


The FCA’s vulnerable customer initiative has been around for some time now with an extensive collection of papers and publications. Kicking off in 2015 with Occasional Paper 8, and more recently, in July 2021, with the FCA providing their Finalised Guidance (FG21/1) on the fair treatment of vulnerable customers.


It remains a key priority and ensuring compliance on this important regulatory topic requires firms to challenge their status quo including adopting more flexibility into their ways of working.


Vulnerability defined

The excellent work the FCA have undertaken through their Financial Lives Survey has really put the spotlight on the realities of life. Its research highlighted that more than half of the UK’s adults (53% in October 2020) have characteristics of vulnerability, and it will come as no surprise, given its length and severity, that the pandemic has increased this figure (46% in February 2020). The FCA have been clear that ‘financial services need to be able to adapt to the changing circumstances that real life throws at people, rather than being designed for the mythical perfect customer who never experiences difficulty’.


So who is a vulnerable customer? According to the FCA, a vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.


Compared to the previous iteration of the guidance, the FCA has repositioned customer vulnerability as a spectrum of risk, moving away from the concepts of ‘potential’ and ‘actual’ vulnerability. It identifies four key drivers of vulnerability:

  • Health (includes 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 retirement, income shock, bereavement and relationship breakdown).

  • Resilience (a customer’s ability to withstand financial or emotional shocks, with a lack of resilience potentially being caused by over-indebtedness or low savings).

  • Capability (including the consumer’s level of financial knowledge and confidence in numeracy and literacy).

How many vulnerable customers does your business have and how do you compare to the data contained within the Financial Lives Survey?


What is the standard?

Don’t be confused here by the word Guidance. The Vulnerability Guidance is issued under FCA Principles and therefore firms must comply.


Recent guidance encourages firms to think about vulnerability as a spectrum of risk and how this risk is increased by having characteristics of vulnerability. Firms can expect to be asked to demonstrate how their business model, the actions they have taken, and their culture, ensures the fair treatment of all customers, including vulnerable customers.


Firms should note that the FCA’s assessment of firm’s treatment of vulnerable customers will be integrated into their supervisory approach. Firms should also be mindful of the lessons from recent enforcement actions and the reference to vulnerable customers.


What do we see in the market?

In our engagement with firms, we see firms making good progress in this area including; training and awareness for senior management, undertaking risk assessments, forming focus groups to understand the needs of their target market, updating policies and processes, and developing staff (particularly those in collections and recoveries) to better engage with customers to customers in vulnerable circumstances. Despite this, identification of vulnerable customers remains low.


Identifying and understanding vulnerability remains a key challenge for firms and achieving this requires trust and an exchange of information between firm and customers that allows for a deeper understanding of customers and their financial circumstances.

Firms should actively consider:

  • Their approach to identifying vulnerable customers and understand the diverse nature of vulnerabilities that exist in their customer base

  • Whether systems and processes are fit for purpose allowing recording and retrieval of information about customers

  • Vulnerability within product governance, including aspects such as pricing, target market, product accessibility, and channel inclusion

  • Their engagement and communication strategies to both identify and interact with vulnerable customers

  • Whether staff have the necessary skills and capability to engage and respond to the range of characteristics

  • The adequacy of their oversight and quality control arrangements

  • The adequacy of their MI and reporting

We would encourage firms to take undertake a gap analysis against the Final Guidance and ensure that senior management can outline their strategy, incorporating practical steps aligned to good customer outcomes and regulatory expectations.


The solution – About Square 4

Square 4 was founded with the vision to support people and businesses grow and thrive.

Across the team, we have extensive experience incorporating the ‘big four’ professional service firms, industry regulators, leadership roles within Global Systemically Important Financial Institutions (G-SIFIs) and other outsourced learning, resourcing and consultancy providers. We combine this expertise with best-in-class technology across an evolving spectrum of conduct, financial crime and operational risk.