For lenders, this brings an array of challenges, especially around identifying those considered financially vulnerable and knowing what action must be taken to adequately support these individuals.
What is financial vulnerability?
Poor health, low financial resilience or a recent negative life event can all leave a person at greater risk of financial harm. Consumers in vulnerable circumstances are often significantly less able to represent their own interests and understand risk.
Perhaps unsurprisingly, a study published by the Royal London back in autumn found 15.9m UK adults to be more financially vulnerable as a result of the pandemic. A third of those attributed the increase in financial vulnerability to a reduced income, while one in five had a lack of savings to fall back on in the pandemic.
With the cost of living continuing to spiral there is a real concern that thousands more will start to struggle.Other factors contributing to this increase included taking on more debt and not being able to afford their living costs, which impacted 13 per cent and 11 per cent respectively. Only 16 per cent reported feeling "very financially resilient".
Vulnerability is not sector specific and if a person is considered vulnerable this will transcend every aspect of their life, from monthly utility bills, mortgage or rent payments, to credit cards and loans. That is why the Financial Conduct Authority’s guidance for businesses on the fair treatment of vulnerable customers states cross-sector collaboration as an essential element in supporting these individuals.
How to identify financial vulnerability
With the cost of living continuing to spiral there is a real concern that thousands more will start to struggle financially, and it is clear that the industry must work harder to support those considered financially vulnerable.
However, before any action can be taken to support these people, they need to be identified, which is a challenge in itself. According to one study, almost a third of businesses admit that they are ineffective at identifying at-risk consumers. Similarly, an inability to spot early warning signs was a critical challenge for 27 per cent of respondents – an increase of 14 per cent compared to the previous year.
Through the deployment of specialist technology, organisations can run far more sophisticated affordability checks, factoring in a range of credit, open banking and transactional data.
Specialist systems can digitally guide consumers through their money management journey.Not only will this help to build a more complete picture of a person’s financial position, lenders will benefit from deeper insight around a person’s monthly income and outgoings, other financial commitments, and their attitudes to saving and spending. It is at this point that any at-risk indicators will also be flagged.
When organisations are aware of a vulnerable person’s circumstances, they are far more equipped to treat them appropriately. Organisations such as the Vulnerability Registration Service have been established to provide lenders with a platform to understand more about who they are dealing with at a given point in time.
How to monitor those considered financially vulnerable
Should a person be identified as financially vulnerable, lenders then need to be able to effectively monitor these cases on an ongoing basis. This involves regularly engaging with the individual to understand if their circumstances have changed and then taking the most appropriate action.
This has been a long-standing challenge for lenders, with very few people feeling comfortable discussing their finances – especially if they are struggling.
Specialist systems can digitally guide consumers through their money management journey, explaining their options in an easy-to-understand and step-by-step format. By utilising open banking data and smart software, these systems connect customer accounts, cards, debts, and assets, identifying the most appropriate and helpful offers available.
With this data collated in one place, consumers can easily view the repayment options available to them. Depending on what the affordability check calculates, they can then decide to continue with their existing journey or consider another option such as a payment break or revised payment plan.
For the consumer, knowing that they will not have to have a difficult conversation over the phone or in-branch will also remove a big hurdle that might previously have prevented them from seeking help.
At a time when the nation’s financial resilience continues to be tested, it is important that the industry works hard to support all consumers – especially those considered vulnerable.
Karen Emmett is head of consumer product at Aryza
