Using technology to understand clients’ vulnerability is going to be vital from a compliance perspective once the Financial Conduct Authority's new consumer duty is in place, an expert has said.
Steph Willcox, head of actuarial implementation at Dynamic Planner, said there are a number of issues that make it difficult for advisers to assess the vulnerability of their clients.
“Assessing a customer as vulnerable is a confusing area, and placing people on a vulnerability gauge is often a subjective task,” she said.
Furthermore, that assessment is likely to change.
“So once the client has been assessed, they may move up and down the vulnerability spectrum quickly based on external or internal events, or they may remain vulnerable forever,” she said.
“We can’t just do it once and be done with it.”
Another issue is the mismatch between how vulnerable clients think they are, and how vulnerable they actually are.
Willcox referenced the FCA’s financial life survey, which indicated there were 24mn adults showing one of more characteristics of vulnerability in 2020.
Although this is a drop from the 26mn recorded in 2017, it still represents 46 per cent of the UK adult population.
This data was released in February 2020, a month before the first lockdown, and Willcox said it is expected the level and prevalence of vulnerability has worsened since then.
However, she highlighted how data from the same study showed 86 per cent of UK adults do not see themselves as vulnerable.
“Relying on our customers to help us in this assessment is clearly not the way to go,” she said.
“Using technology to put robust questionnaires in place, collecting data that might be useful in assessing vulnerability, and ensuring that they are retaken frequently, and in particular, before any changes are made to a customer's financial position, is going to be vital from a compliance perspective.”
She added that it will also be essential for companies to put in place the correct governance to provide training and guidance to their employees to help them recognize the drivers of vulnerability and to make sure they take these into account when interacting with customers.
The FCA’s new consumer duty will be implemented on April 30 next year, despite concerns from some firms around the proposals’ proportionality and design, as well as any potential consequences.
The FCA first set out plans for a new consumer duty in May last year, stating it was designed to create a higher level of consumer protection in retail financial services.
The new duty will include three elements:
- The consumer principle, which will reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is: 'a firm must act in the best interests of retail clients' or 'a firm must act to deliver good outcomes for retail clients';
- Cross-cutting rules which would require three key behaviours from firms: taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives, and acting in good faith;
- It will be underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes – communications, products and services, customer service and price and value.
As part of the duty, the FCA has said it wants firms’ communications to support and enable consumers to make informed decisions about financial products and services.
Willcox said Dynamic Planner’s research had shown that understanding more about a client’s financial self efficacy gives a much greater insight into how clients may behave during periods of volatility, and therefore, how companies might approach communicating with them during this time.