‘Minimal leniency’ expected from FCA in vulnerability review

While the regulator has mentioned examples of good and poor practice before, the FCA confirmed it would be reviewing how firms treat customers in vulnerable circumstances, making good on a commitment made in 2021.

The review comes less than a year after the introduction of the consumer duty, which built on pre-existing guidance on treating vulnerable customers fairly; though the regulator effectively gave firms three years’ notice about the review.

“This latest FCA focus should be a wake up call for firms who could and must do better in recognising, addressing and documenting vulnerability,” says Keith Richards, chief executive of the Consumer Duty Alliance and chair of the Financial Vulnerability Taskforce.

A long-running theme for the regulator

Guidance for firms on the fair treatment of vulnerable customers was published in 2021, but this ignores the fact that the regulator began work on customer vulnerability many years before, says Jonathan Warren, head of innovation at Altus Consulting.

“Consequently, the industry should expect minimal leniency from the FCA in their review,” he adds.

In 2015 the regulator published an occasional paper that aimed, among other things, to support firms to develop and implement a vulnerability strategy, provide good examples of how some firms treat vulnerable consumers, and highlight where they had not been treated fairly.

“Furthermore, the need to ensure the fair treatment of vulnerable customers has been reiterated as a core thread through a lot of the FCA’s subsequent work, particularly as a core pillar of the consumer duty,” Warren says.

“The industry cannot say it hasn’t had time, been reminded or warned.”

Indeed, the regulator has been seen to take a tough stance on topics where it has previously warned that firms need to take action, says Richard Barnwell, a financial services advisory partner at BDO, an accountancy and business advisory firm.

In a consumer duty webinar in December, for example, the FCA’s head of consumer investments, Kate Tuckley, said the regulator was “relatively disappointed” with consumer investment firms’ approach to vulnerability.

We can expect the FCA to want to see real change here.Richard Barnwell, BDO

On the other hand, in another webinar in 2021, FCA technical specialist Mark Goold cited as part of an example of good practice how one adviser used a free tool provided by a consumer trade body to help assess his current practices around customer vulnerability.

Warren at Altus, which developed a ‘vulnerability radar’ tool with The Investing and Saving Alliance, says: “The average score of the assessments done in 2023/24 stands at 59 per cent, with the highest score standing at 83 per cent.

"The scores indicate the FCA, as you could predict, will find instances of good and bad practice, and varying attitudes and approaches."

Although Warren says that little should be expected from the regulator in the way of leniency, he adds firms can expect the FCA to be pragmatic in its review and response.

“The subject of vulnerability remains a complex and sensitive challenge, covering a broad spectrum of consumers’ circumstances and their individual reaction to it.

“The overall average scores we have seen in the vulnerability radar have gradually improved incrementally since it launched, which reflects that the fair treatment of vulnerable customers is not a cliff edge piece of work. It will never be completed. 

“Firms need to evidence a continuous cycle of improvement to better understand different conditions and circumstances and refine their response.”

Lessons from the past

In a November letter to chief executives of wealth managers and stockbrokers, the FCA said it expected firms to reassess the vulnerability status of their consumers. 

Particular mention was made to the 49 per cent of portfolio managers and 69 per cent of stockbrokers surveyed who identified no vulnerable consumers. This was despite the fact that 50 per cent of consumers will be classified as vulnerable over their lifetime.

“If companies are only reporting low or single figure proportions, then it is likely they will be asked for further measures,” says Andrew Gething, managing director of MorganAsh, a provider of consumer vulnerability management software.

“This could include the scope of vulnerabilities, how they assess all customers, and not just those who volunteer their vulnerability.

“Then, how they are monitoring these vulnerabilities through the lifecycle of the product; and finally, how they are reporting on the outcomes for the vulnerable cohorts compared to the resilient.

“This requires good data to assemble these reports, so explaining how the data is assembled consistently is a cornerstone of reporting capability.”

Likewise, it is important that firms consider instances and share best practice where advice has been directly impacted because of a client’s vulnerable situation, says SimplyBiz’s head of policy, Sandy McGregor.

The type of information that could be valuable and anonymised where appropriate, he says, would be the nature of the vulnerability identified: was it disclosed or identified throughout the sales process, is it permanent or temporary, how has it changed the outcome of the advice, product and/or service? Are there any future special arrangements in place, and have these dealings led to any changes in how the firm deals with future clients?

“All of this information should help build knowledge and capabilities within the firm and also feed into any ongoing review of the firm’s vulnerable persons policy,” McGregor adds.

With the treatment of vulnerable consumers being a consistent regulatory theme since 2015, increasing in focus over the past three years after the pandemic, and featuring prominently in the consumer duty, the FCA can be expected to want to see real change, says BDO's Barnwell.

“Where it doesn’t see change, we can expect the FCA to use the tools at its disposal to oversee change, and if it believes vulnerable consumers have suffered harm, for those consumers to be identified and redressed.

“The FCA also has powers to pause firms’ activities, such as taking on new customers, if it is not satisfied that processes and governance are sufficiently robust,” says Barnwell. “We could expect to see enforcement action for the most serious failures.”

In terms of regulatory consequences, Warren agrees that it is likely to depend on the severity and breadth of the issue, and whether it is isolated to a firm or found to be more systemic.

“If systemic, a ‘Dear CEO’ letter is likely. If not, firms could see themselves brought into enhanced supervision, or have enforcement action taken against them if the breaches are both bad enough and they persist. Most, however, are likely to be given the opportunity to improve.”

Chloe Cheung is a senior features writer at FT Adviser