Some readers might remember that the FCA issued a guidance consultation paper in July 2019, GC19/3 – Guidance for firms on the fair treatment of vulnerable customers.
The consultation closed in October and final guidance was expected to be published early 2020. That has now been deferred, with no timescale indicated for its publication. Another casualty of the pandemic it would appear.
Nonetheless, the FCA’s direction of travel was clear in the consultation paper and, given the current health emergency and the likelihood that a greater number of clients might be vulnerable as a result, we thought it would be helpful to summarise some of the key points.
How might COVID-19 create vulnerability?
The COVID-19 pandemic, and efforts to deal with it, could lead to two possible sources of vulnerability, health and financial, that could potentially now apply to some clients who previously would not have been considered vulnerable.
In many firms, a large proportion of the client bank will be older individuals and it is clear that there is a direct relationship between increased age and increased risk of more serious outcomes in the event of contracting the virus. Alongside that concern, older clients might well be in isolation for longer, initially as part of the current ‘lockdown’, and perhaps even after the restrictions are relaxed, as a result of continuing risk and fear of being infected. That could mean a greater number of older clients feeling or being vulnerable, albeit temporarily. Many vulnerabilities are transient.
Despite the Government’s significant fiscal interventions, some businesses might not survive the duration of the emergency, leading to job losses. It is possible that some employees have already been ‘let go’ where the business was unable or unwilling to furlough them under the Government’s job retention scheme. The uncertain future that faces many could lead to business owning or employed clients feeling financially vulnerable at the least, or actually finding themselves in financial difficulties for the first time. The recent significant market drops exacerbate the problem.
This could have an immediate impact on adviser firms. Prior to the health emergency, it is likely that many client reviews were fairly straightforward and mechanical, reflecting that, in a high proportion of cases, the client’s circumstances remained materially unchanged from one year to the next.
That may now have changed as a result of more clients becoming vulnerable for the health or financial reasons indicated above.
Accordingly, many clients who were recommended to invest in light of the objectives, personal situation, risk profile and time horizon applicable at the time of the recommendation could well now have different objectives, personal situation, risk profile and/or time horizon. This could lead to fewer reviews being a straightforward rebalance and confirmation of continued suitability and a greater number of reviews requiring more fundamental changes of strategy, a new personal recommendation and a full suitability report.
That has time and resource implications for firms.
Summary of the FCA’s proposed approach to vulnerability
Below, we summarise some key points from the consultation paper. Firms should refer to the paper for more detail, including examples of good and poor practice.
There are four key areas that firms should consider:
- Understanding vulnerability
There are four main drivers of vulnerability:
- Health – e.g. disability or serious illness;
- Life events – e.g. bereavement, relationship breakdown, job loss;
- Resilience – e.g. erratic income, debt, lack of support structure;
- Capability – e.g. poor language, numeracy or IT skills.
Firms should identify the vulnerabilities that could realistically exist in their target market or existing client bank. Some clients will immediately come to mind as being vulnerable in relation to one or more of the drivers above. But there could well be other clients that have not been identified, or perhaps clients who are newly vulnerable as a consequence of the pandemic as described above.
Against each likely category of vulnerability, the firm should identify how the client experience might be affected and identify appropriate responses that can practicably be implemented.
This can form the basis of a vulnerable client policy that can be documented. The policy can be made available to clients, new and existing and can form the basis of staff training on knowledge and process.
- Skills and capability of staff
Firms should make sure that all staff, in particular those who operate at the frontline, have the appropriate skills and capability to treat vulnerable customers fairly. The FCA considers this to be an element of competence for the role. This is likely to require staff training sessions so that individuals:
- understand the firm’s policy on dealing with vulnerable clients;
- are able to identify when a client could be vulnerable;
- are able to discuss the matter effectively and sensitively;
- know the appropriate responses including how ‘normal’ business processes might need to be adjusted to reflect the particular vulnerability.
Firms should create an appropriate training program, perhaps including assessment of competence.
It may also be of value to refer to specialist third party organisations for advice and guidance on specific vulnerabilities, for example the Royal National Institute of Blind People (RNIB) or mental health organisations.
- Practical action
The practical actions that firms need to take should arise naturally out of the first two aspects as described above. Here are some suggestions:
- identify existing known vulnerable clients and those that might be newly affected by recent events, e.g. clients that have expressed specific concern about market losses;
- incorporate vulnerability assessment/questions in fact find and review processes;
- identify any data protection implications and resolve these – details of vulnerability might constitute special category data requiring explicit valid consent, especially health vulnerability;
- ensure advisers are aware of the appropriate responses to any vulnerabilities that are known or identified.
Possible responses would include:
- ensuring clients are accompanied if appropriate or desired
- adjusting communications … perhaps offering larger print in paper communications or communicating digitally so that visually impaired clients can use text to speech software.
- Monitoring and evaluation
Firms should regularly monitor the extent to which they are doing what they should under the Principles in terms of treating vulnerable consumers fairly. As with many processes, the way the firm deals with vulnerable clients should evolve over time to ensure they are achieving the right outcomes for vulnerable clients.
Feedback from staff and clients will inform required changes to the process. Firms should consider proactively inviting feedback from clients, instead of simply reacting to feedback volunteered. Ensure that it is easy for clients to give feedback, or complain and that they are informed how to do so.
In addition, an occasional review of all processes should also include those relating to vulnerable clients.