Treatment of vulnerable customers - a hot topic for retail banks

The FCA has this week published its guidance on its expectations of firms in relation to the fair treatment of vulnerable customers.

This is an understandably prominent issue, particularly in the context of the economic and financial impacts of Covid-19 lockdown measures in the UK. Indeed, according to the FCA's Financial Lives 2020 survey, as at February 2020, 46% of adults in the UK had characteristics of vulnerability and by October 2020 (according to the Covid-19 panel survey) this had increased to 53%. That trend will have continued in the following months.

FCA expectations

The FCA expects firms to provide customers with a level of care that is appropriate given the characteristics of the customers themselves. Firms need to ensure that customers are treated fairly and in order to do this, need to fully understand the characteristics of vulnerability in their target market and main customer base. The FCA expects the fair treatment of vulnerable customers to be fully embedded in the culture of firms throughout all departments, not just in key customer facing teams such as collections. It is expected that firms understand how their actions can perpetuate or worsen an individual's vulnerability, for example, through over-zealous debt collection without appropriate forbearance measures.

Firms are expected to take additional care in relation to vulnerable customers to ensure their needs are met fairly. This includes an expectation on firms to spot customers with early indicators of vulnerability and to act to prevent risk of harm to these customers emerging or growing. This means that firms need to design their products and services to (1) correctly and swiftly identify vulnerable customers; and (2) respond appropriately and fairly to the needs of those customers. The FCA has further reminded firms about their obligations under the Equality Act 2010 as there is an overlap between protected personal characteristics under the Equality Act and characteristics of vulnerability. Where there is a breach of the Equality Act, it is likely that this will also constitute a breach of the FCA's rules.

The vulnerability spectrum

A vulnerable customer is somebody who, due to their personal circumstances, is especially susceptible to harm particularly when a firm is not acting with appropriate levels of care. Vulnerable customers may require additional measures to ensure good outcomes and their needs are likely to vary significantly. There is a huge array of different circumstances that may lead to a customer becoming vulnerable and the FCA's guidance should not be taken as containing the only indicators of vulnerability. Instead, the FCA refers to vulnerability as a spectrum of risk. All customers are at risk of becoming vulnerable but the following areas are particularly indicative of vulnerability:

• Health - customers with health conditions or illnesses that affect their ability to carry out day-to-day tasks.
• Life events - customers who have experienced significant life events such as bereavement, job loss or relationship breakdown.
• Resilience - customers with a low ability to withstand financial or emotional shocks.
• Capability - customers with a low knowledge of financial matters or low confidence in managing money (financial capability). Low capability in other relevant areas such as literacy or digital skills.

Vulnerable customers can have additional or different needs to the general population and may have less ability, or willingness, to make decisions or to represent their own interests. This means they can be at a greater risk of harm, particularly if things go wrong. The guidance makes clear that firms must consider what characteristics of vulnerability are particularly relevant to their target market and customer base. Many customers will have a complex web of vulnerability characteristics, and firms will often see individuals who are subject to a number of characteristics of vulnerability, for example, job loss could lead to low mental ill-health.

Our observations

The publication of the FCA's guidance on vulnerable customers is yet further evidence of the increasing importance for firms to treat customers, and particularly vulnerable customers, fairly. It has been published against the backdrop of:

1. A number of recent final notices from the FCA relating to the fair treatment of customers throughout the customer journey. For example, the recent Lloyds Banking Group Final Notice focused on the handling of mortgage customers in payment difficulties or arrears.  The FCA highlighted that the Bank's actions had risked putting a large number of customers, including vulnerable customers, at risk of being treated unfairly. The FCA stated that "It is essential" that firms dealing with mortgage customers effectively engage with customers as, a failure to do so could, in the worst case, result in the repossession of the customer's home that would otherwise have been avoided. The notices highlighted that the FCA requires firms to consider vulnerable customers and offer appropriate forbearance solutions. While these are some of the first regulatory actions in relation to the fair treatment of customers in arrears, it is expected that they will not be the last, particularly in circumstances where an increasing number of individuals are finding themselves in arrears.

2. Evidence that the Covid-19 pandemic has resulted in 1 in 2 customers having at least one of the characteristics of vulnerability. This will be placing significant strain on the current systems set up to deal with customers in financial difficulty as well as the level of resourcing required to appropriately deal with customers in financial difficulties. We anticipate an increasing need for manual intervention into automated processes and a need for financial institutions to have reliable customer outcome testing throughout the customer journey. It is foreseeable that the unfair treatment of vulnerable customers in particular, will continue to be a focus for the FCA and will become an area for regulatory investigation, in its own right, where the FCA has concerns about institution-wide treatment of vulnerable customers.

We anticipate that firms (and Senior Managers with responsibilities relating to a firms culture) will need to have an increased focus on the treatment of vulnerable customers over the coming months. Furthermore, we anticipate the increased scrutiny on fair treatment of vulnerable customers will move beyond entities regulated by the FCA and will begin to become a focus in relation to other consumer facing activities such as the provision of energy and other home services. The move towards greater scrutiny for institutions providing credit to consumers, already a focus in 2019-20, has only been expedited by the impacts of the covid-19 pandemic. Firms must ensure that the fair treatment of customers, and particularly those in vulnerable circumstances, remains a paramount point of focus over the coming months and years or else risk regulatory, and media, scrutiny.

The FCA's full guidance can be found here.