Vulnerable customers: what lies ahead?

Who this blog is for

Board members, senior executives and those working in risk and compliance teams, particularly those involved in Duty compliance and the treatment of Vulnerable Customers (VC) across financial services firms.

At a glance
 

• The FCA has carried out extensive work on firms’ approach to customers in vulnerable circumstances and published its findings alongside detailed examples of good and poor practice for firms to reflect on and use to improve their current approaches.
• Worryingly, the FCA’s consumer research has identified significant evidence that VCs do receive worse outcomes than non-VCs in particular when looking at customers’ communication experiences with providers. This differential widens as the number of characteristics of vulnerability a customer presents with increases. 
• Although the FCA notes that firms’ current treatment of VCs has improved since the publication of its Guidance on the fair treatment of VCs, firms still have a lot more work to do. The FCA is satisfied that existing Guidance together with the Consumer Duty rules are sufficient to allow firms to make further progress. As a result, the FCA will not issue new rules or guidance in this area.
• The review findings include helpful examples of good and poor practice in four key areas: governance and outcomes monitoring, consumer support, consumer understanding, and products and services.
• The area of greatest concern is outcomes monitoring, where the FCA states that very few firms are making effective use of data to monitor outcomes. This is where the gap between the FCA’s expectations and firms’ capabilities seems to be greatest. The FCA also raises significant concerns over the product and services Duty outcome in relation to VCs. 
• The FCA plans to drive further improvements by having VC outcomes as a top priority within its Consumer Duty work with firms. Last week we published an article summarising our analysis of FCA’s publications over the past two years that refer to VCs – we identified a range of key insights that are aligned with the review findings and provide more depth in those areas that require firms’ attention.
• Finally, narrowing the gap in differential outcomes will require firms to innovate and invest. Current workarounds and using only readily available data are not enough; firms will need to rethink their VC approach to find a sustainable path to full compliance.

Introduction

The FCA has released the much anticipated findings from its review of firms’ treatment of customers in vulnerable circumstances (“the review”). As part of the review, the FCA conducted:

• a survey of 725 firms;
• interviews with experts on vulnerability and financial services;
• multi-firm work on outcomes monitoring with 29 firms across 12 markets;
• an in-depth examination of bereavement customer journeys of seven retail banks and building societies; and
• an analysis of the Financial Lives survey data.

The findings are backed by externally commissioned consumer research that reveals material differential outcomes between VCs and non-VCs, with a greater differential for customers with more than one characteristic of vulnerability. The FCA’s document on Good practices and areas for improvements details specific areas where the FCA expects to see significant improvement.

Key messages

A consistent theme emerges across the FCA's three publications: VCs are experiencing poorer outcomes compared to non-VCs. The FCA highlights persistent issues throughout the customer journey, such as VCs needing to repeatedly explain their circumstances due to inadequate record-keeping or how in other circumstances inflexible processes could lead to unsuitable recommendations. While acknowledging that some obstacles may be unavoidable, the FCA clearly expects firms to make significant improvements to their processes to serve VCs better.

The FCA remains committed to collaborating with industry to drive improvements in the treatment of VCs. This commitment likely signals further regulatory work, particularly for firms whose data reveals them as outliers. The FCA has also concluded that there will be no new rules or updates to the original Guidance on the fair treatment of VCs.

Detailed findings

The good practices and areas for improvements publication outlines findings in four key areas: governance and outcomes monitoring; products and services; consumer support; and consumer understanding. Firms are strongly encouraged to benchmark themselves against these findings and address any gaps in their treatment of VCs. We have provided a summary of the key areas for improvement for firms in each of the categories below:

The FCA is significantly concerned with issues surrounding outcomes monitoring, where it found that very few firms are making effective use of data to monitor outcomes. A key concern highlighted by the FCA is the inability of many firms to demonstrate what good outcomes look like for customers, particularly those with diverse or additional needs. The definition of good outcomes in the context of customers in vulnerable circumstances is an area where firms will have more work to do as it will require a much more granular level of outcome definition than is commonly seen in the market. For example, the FCA describes how a customer in distress or in a crisis expects much faster response times from their provider than in normal circumstances.

However, it is currently unlikely that firms can adapt to respond to the customer’s sense of urgency leading to VCs being less satisfied with the interaction speed. The disparity between the FCA’s expectations and current industry capabilities presents a substantial challenge for firms. Addressing this gap will require significant investments in developing the necessary data infrastructure to meet the requirements. Furthermore, the FCA seems particularly interested in firms exploring the use of AI to support VC identification more systematically, providing a few examples of good practice in this area.

The FCA has also expressed significant concerns over the product and services Duty outcome in relation to VCs. It highlights a pressing need for substantial improvement in training product design staff on vulnerability, noting that only 54% of respondent firms provide such training to non-frontline staff. Furthermore, only 29% of firms have tested the impact of firms’ products or services on VCs.

While less pronounced than in other areas, the FCA has signalled areas for improvement in consumer support and consumer understanding outcomes which are included in the table above.

VC regulatory publication landscape

While the FCA’s review provides valuable insights and identifies good practices, it represents only some of the regulatory guidance available on the treatment of VCs. Firms should view these findings as part of a broader landscape and consider them alongside our recent research piece on VCs, which provides a comprehensive analysis of VC-related regulatory publications, over the last two years, across all sectors. For an in-depth conversation about our consolidated database underpinning the research, please contact the team. For more information on self-assessing your VC framework, please click here.

Conclusion

The review findings paint a challenging picture for firms, notwithstanding the FCA’s recognition of the progress and effort firms have already made. Some key areas need more work. The fact that VCs seem to be receiving worse outcomes compared to non-VCs in their interactions with firms is worrying and the FCA will certainly want to see firms make progress here. What will it take for firms to narrow the gap in VCs’ differential outcomes? With the introduction of the Duty, firms have seen the risks and costs of running their business increase. The real test for firms on their approach to VCs will be to find a commercially viable and sustainable way to build on and extend the progress made so far. Finding efficient ways to deliver good outcomes for VCs will require firms to identify where their current approaches fall short of what VCs need and that improving them will involve creative thinking and investment.

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References:

1. We assessed the level of the FCA’s concern on the basis of the language the FCA used to describe the issue and the number of firms affected by it (for example: “a small number of firms used data effectively”, “most firms …were unable to show how they effectively monitor…”.