Following consultation, the FCA published final guidance on vulnerable clients in February 2021 (FG21/1). We wrote about this topic and the regulator’s guidance as it arose. You can read those previous articles here and here.

In our February article, we overviewed the final guidance, the definitions around vulnerable clients and how to identify them. In the March article, we tried to get to grips with how to implement the guidance in practice, which is ATEB’s standard approach to regulation – make it practical.

The trouble is that implementing a process around vulnerable clients is like herding cats. There are so many permutations and variables and copious ‘guidance’ but precious little in the way of actual rules. The word ’vulnerable’ appears in the FCA Handbook a mere 51 times, only 21 of which relate to vulnerable clients and those, without exception, relate specifically to mortgage or debt linked business. On the other hand, the finalised guidance covers around 25,000 words in 57 pages.

And that, we suggest, is where the implementation difficulty starts. The guidance, like the entire concept of treating vulnerable clients fairly, is well intentioned but rather nebulous in many respects.

The introduction section states that, in order to achieve good outcomes for vulnerable clients, firms should “understand the needs of their target market / customer base and respond to customer needs throughout product design, flexible customer service provision and communications”. That reads like a perfectly valid, if somewhat cliched, mission statement for ANY business but is adrift from any obvious connection with vulnerable clients. It is too generic and high-level. It should read something like, “understand the needs of each identified vulnerable client and respond in a manner that appropriately reflects that client’s vulnerability”.

And some of the examples of good and poor practice are also pitched at too high a level. For example, where they refer to product features or product design. Sort of relevant in the context of the example but hardly of application in the context of an adviser’s relationship with any individual vulnerable client.

Practical considerations

To be fair, the paper does attempt to get to drag the otherwise rather esoteric guidance into the vicinity of everyday business with chapter 4 – ‘Taking practical action’. However, the first 6 pages are based around product design with little or no application in the average adviser firm’s business model. The content does eventually consider individual clients rather than categories of client bundled into a ‘target market’.

Unsurprisingly, the examples reflect the more obvious vulnerabilities such as vision or hearing impaired, or otherwise physically disadvantaged, clients. The appropriate response to such vulnerabilities is mostly equally obvious – large print or Braille documentation, recorded meetings and so on. But other vulnerabilities, in particular mental difficulties can be less easy to identify or respond to.

High-level guidance is clearly much easier to put together than client level guidance where, as indicated earlier, the number of permutations is large. We have come across two scenarios where the guidance offers no assistance at all and which demonstrate that sometimes there is virtually nothing a firm can do to protect a vulnerable client.

Scenario one …

A firm had an elderly lady client who was invested mostly in a drawdown plan. She contacted the firm regularly to request a withdrawal of funds. The level of withdrawals was significantly higher than the firm had agreed with her at outset and, more worryingly, was significantly higher than could ever be sustained in the plan. The result was a rapidly dwindling fund and a client who continued to request withdrawals despite the firm taking pains to discuss the situation with her and putting into writing that she was in serious danger of running out of funds, at which time she would have insufficient other income sources to sustain her expenditure.

The client did not have any family, nor was there a LPA in place. Accordingly, the firm was unable to find any other means to influence the situation and could only watch as she continued to ignore the firm’s warnings and recommendations.

The outcome here was one for which the client was both the architect and the victim. The next case was more sinister with a mysterious third party involved in what seems to have been a scam.

Scenario two …

In this case, a firm had a client with a modest drawdown pot who had retired the previous year and who had been accessing the funds at a sustainable rate as recommended by the firm. The client then contacted the firm and requested a withdrawal of £10,000. This was unexpected but did not in itself present a potential issue. However, the firm identified two danger signs. First, the client had to have the funds by a certain imminent date. Second, the client was reluctant to disclose what the purpose of the withdrawal despite the firm’s relationship with the client hitherto having been entirely open and friendly. The firm did persuade the client to provide a bit more detail and, far from reassuring the firm that all was well, the detail raised suspicions of a scam. The client stated that the money was required for an investment in ‘art’, that he had been offered this opportunity by a third party, unregulated individual and that the money had to be paid by the stated date or the investment ‘opportunity’ would be lost. Further, the client stated that he had been told not to reveal any details of the investment on pain of losing the opportunity.

Concerned, the firm tried to explain to the client that the withdrawal would have an adverse impact on his future income from the pension pot, on which he had been relying to provide the agreed level of income in retirement. In addition, although the firm did not have any real detail about the ‘art’ investment, it was likely that, even if real, it would be illiquid and not able to contribute readily to the client’s future income needs. On top of this, the firm explained its suspicions about the possibility of a scam – the deadline, the secrecy, the unnamed, unregulated third party ‘adviser’. But the client was determined to proceed despite the firm’s warnings and the withdrawal was duly made.

A few days after the ‘due date’ of the ‘investment’ passed, the client again contacted the firm and requested a much larger sum be withdrawn. A repeat of the previous discussions took place and it transpired that the withdrawal was again for an ‘art’ investment and there was again a deadline just a matter of a couple of weeks away. This withdrawal would leave very little remaining in the drawdown pot and would clearly leave the client without adequate liquid resources to meet his income needs. At this point the firm approached ATEB for advice. Our view was that the situation had all the hallmarks of a scam but there seemed little the firm could do in the face of a client determined to access his own money despite the fact that his subsequent income would be severely affected.

We discussed the situation with a specialist at the FCA who offered some helpful suggestions but ultimately agreed that if the client could not be persuaded of the risks of the withdrawal there was little that the firm could do. As any withdrawal that does not qualify as execution only must be subject to a personal recommendation, the firm, with input from ATEB and the FCA, explained to the client that they had to issue a formal recommendation and suitability report and that would a) take time and b) be difficult if the client did not fully explain his intended investment. It was hoped that this would at the very least buy a little more time during which the client might be persuaded to reconsider as well as put in writing the firm’s concerns.

All to no avail. The client terminated his relationship with the firm and requested the withdrawal directly from the drawdown provider. Despite the fact that the firm had explained its concerns to the provider, the withdrawal was implemented. To be fair, the provider probably had no choice but to action the withdrawal instruction. It was, after all, the client’s money and he was entitled to do with it as he pleased, whether that be sensible or silly.