Factors to consider when assessing vulnerability
- Describe some of the challenges of identifying vulnerability
- Explain other ways of identifying vulnerability
- Explain people's view of their own vulnerability
- Describe some of the challenges of identifying vulnerability
- Explain other ways of identifying vulnerability
- Explain people's view of their own vulnerability
Although it is unrealistic for firms to explore all areas of potential vulnerability and identify every client with characteristics of vulnerability, as part of the consumer duty, firms are expected to encourage clients to share information about their needs and circumstances, and staff should be supported to identify signs of vulnerability by receiving training, resources and access to systems and processes that allow clients to disclose their needs.
Characteristics associated with the four drivers of vulnerability
| Health | Life events | Resilience | Capability |
|---|---|---|---|
| Physical disability | Retirement | Inadequate or erratic income | Low knowledge or confidence in managing finances |
| Severe or long-term illness | Bereavement | Over-indebtedness | Poor literacy or numeracy skills |
| Hearing or visual impairment | Income shock | Low savings | Poor English language skills |
| Mental health condition or disability | Relationship breakdown | Low emotional resilience | Poor or non-existent digital skills |
| Addiction | Domestic abuse (including economic control) | Learning difficulties | |
| Low mental capacity or cognitive disability | Caring responsibilities | No or low access to help or support | |
| Other circumstances that affect people's experience of financial services, eg leaving care, migration or seeking asylum, human trafficking or modern slavery, or convictions |
Assess vulnerability from a subjective perspective
The majority of vulnerability characteristics presented in the table above can be captured through a questionnaire or even through open finance with the help of technology.
However, assessing low mental capacity or cognitive disability, for example, should be reserved for clinical practitioners and is not something that would be easy to identify using technology alone, nor should it be expected of a financial adviser.
Using technology to put robust questionnaires in place and collecting data that may be useful in assessing vulnerability, ensuring that they are re-taken frequently, particularly before any changes are made to a customer’s financial position, is going to be vital from a compliance perspective.
Nevertheless, for most advisers, and indeed the wider industry, assessing a customer as vulnerable is still a confusing area, which is why it is imperative that companies put the correct governance in place to provide training and guidance to their employees to help them recognise the four drivers in real life and ensure they are taking vulnerabilities into account when interacting with customers.
It is important that the presence of a vulnerability characteristic is not the only factor that is considered; the interference it causes is essential.The FCA states that to examine a client’s vulnerabilities, particularly in regard to their financial resilience, it is important to use both objective measures, such as whether a client missed paying their bills in three or more of the past six months, and subjective measures, such as whether a client losing their main source of income for as little as a week would be a heavy burden.
Academic research highlights that subjective factors of vulnerability such as a client’s confidence in managing their finances and impulsive behaviours are important for assessing clients' vulnerability. Therefore, innovative measures are required so that objective measures of vulnerability are not solely relied upon, such as a client’s level of debt or their savings.
Subjective factors of vulnerability are important to assess as a client’s ability to manage their emotions, for example, can influence the level of distress they experience during a challenging life event.
Subjective characteristics are embedded within the FCA drivers broadly relating to emotional resilience and self-efficacy, but these areas require more of a psychometric approach.
