Vulnerable customers: what the FCA’s focus on ‘low resilience’ means for firms

16 November 2017

After pledging to prioritise the most vulnerable consumers in its April 2017 Mission, the Financial Conduct Authority (FCA) has now begun to set out what that looks like. In a consultation on its approach to consumers earlier this month, the FCA said it will focus on consumers with ‘low resilience’. This is both a new and key term for the FCA and its prominence is likely to bring significant consequences for firms.

So what does ‘low resilience’ really mean? The FCA defines the term as consumers with a low capacity to absorb financial shocks – such as a small increase in their monthly mortgage payments. What is very interesting is that this group comprises a large section of the UK population – indeed, the FCA believes about 30% of UK adults have low financial resilience. Its ‘Financial Lives’ Survey in 2017 found 19% of the population lives on an annual household income of below £15,000, and 21% of UK adults say they could not cover expenses for more than a month if they lost their main source of household income.

What will the FCA do to prioritise these consumers? The FCA argues that low resilience can contribute to vulnerability and exacerbate harm – for example, for someone on a very low income, a problem that makes them £100 worse off could put them in a downward spiral of debt. The FCA also discusses the ‘scarcity mind-set’ – the theory that a lack of time or money causes stress and so affects the way consumers approach problems and make decisions. As a result, it says that in identifying vulnerability, it will now take into account the ability of consumers to recover from harm and the wider impact harm may have on their financial and emotional wellbeing.

And, bringing this all together, the FCA is now proposing changing its definition of vulnerable customers from ‘those who are especially susceptible to harm because of their circumstances’, to: ‘people who can readily be identified as significantly less able to engage with the market, and/or people who would suffer disproportionately if things go wrong’.

While the FCA says this updated definition doesn’t mark a change of direction, it certainly gives cause for firms to revisit their policies and processes to ensure they adequately factor in the concept of financial capability and financial resilience in how they define and treat fairly vulnerable customers. The FCA defines capability as very low knowledge of financial matters or low confidence in managing money; it believes 17% of UK adults fall into this category. Historically, firms may have defined vulnerability more through customer circumstances (e.g. serious ill health, bereavement). They now need to make sure they are able to properly identify consumers with low capability or resilience – do they have the right data, systems and staff knowledge to be able to identify the signs and triggers?

The FCA also makes clear that its prioritisation of low resilience will permeate all of its work: from supervision to enforcement and redress. What might this mean in practice? It means, for instance, that the FCA will take into account the extent of harm to vulnerable groups when calculating what penalty to impose on firms for misconduct.

It also means the FCA is more likely to intervene in sectors where a high proportion of customers have low financial resilience, such as consumer credit. The FCA notes that interventions could include exploring whether customers should take out alternative products. So firms need to think very carefully about their product governance processes and how they ensure their products are (and continue to be) designed, marketed and sold to a target market that is appropriate.

Firms have made a great deal of progress in recent years in the way they identify and treat vulnerable customers, but this latest evolution in the FCA’s thinking means there’s plenty more work ahead.

John Coley | Director
Profile | Email | +44 (0)20 7213 8075
Tessa Norman | Senior Associate
Profile | Email | +44 (0)20 7213 2508
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