What makes a customer vulnerable?
Helping businesses and advisers answer this question has been a focus for the Financial Conduct Authority for a number of years. In 2017, vulnerable customers were at the heart of the regulator’s mission statement.
There is no doubt that the identification and treatment of vulnerable customers is a complex area. But as a consultant on regulatory issues, at Bovill I know how freely the term ‘vulnerable’ can be bandied around.
So what does it actually mean and how does it impact your customers and business?
The FCA defines a vulnerable customer as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a company is not acting with appropriate levels of care”.
While this is a fairly nebulous definition, it does clarify the misconception that vulnerable customers are just those who are at risk of the common frailties of ageing.
Indeed, vulnerability is more widespread than some might imagine, with research finding that more than half of adults are struggling to keep up with bills and just under half of UK adults have ‘poor’ numeracy skills.
The FCA has divided the causes of vulnerability into four categories:
• Health: A customer’s physical or mental health can vary throughout their life. Some customers may have learning difficulties that may affect their understanding of financial services.
Others may have had a very detailed understanding of financial services throughout their life, but may lose this ability if they develop degenerative diseases such as Alzheimer’s.
• Resilience: It has been identified that more than a third of UK adults are unable to bear financial losses. This means all the money they have is needed to get by, so if this is lost it will have a significant impact on their standard of living.
Consequently, this would bring about financial and emotional hardship, making a customer more vulnerable.
• Life events: The stress of traumatic events such as the bereavement of a loved one, divorce or redundancy, could all have a significant effect on a person’s ability to engage with their finances and make sound decisions.
• Financial capability: Financial literacy may differ between individuals. A low level of financial understanding may bear no relation to a person’s overall intelligence, however, it will have an impact on how they understand and relate to financial services.
It is important to remember that the level of a customer’s vulnerability is very personal to their circumstances, and the timeframe for this potential vulnerability may vary.
Below are two fictional case studies that detail some of the more common changes and challenges we see in a customer’s life.
At the end of each one are some ideas on how financial advisers can offer the best support to their customers, whether or not they face similar situations.