General Insurance Article - Vulnerable customers and the invisible challenge to FS firms

If you read regulatory papers, you will know that the issue of vulnerable customers is very much part of the regulatory agenda. Recently, the Financial Conduct Authority (FCA) released its 2019/20 Business Plan, where ‘ensuring the ?nancial needs of vulnerable customers are met’ was stated as one of its key priorities.

 By Jonathan Warren, Consultant at Altus

 But this isn’t news. Four years ago the FCA released Occasional Paper No. 8: Customer Vulnerability, in which it stated that vulnerable customers are not receiving fair treatment from their ?nancial service providers. The paper critiqued legislation and the regulator’s approach, commenting that both have been historically written and were biased towards meeting the needs of your typical consumer, even though vulnerable customers are more likely to suffer harm.

 Several subsequent FCA papers have referenced or covered the issue of vulnerable customers, such as Smarter Client Communication, Financial Lives Survey, Approach to Consumers and their expectations around automated advice services. The issue has even started to receive political attention with the establishment of a Treasury Select Committee. The Select Committee will focus on the interaction between ?nancial services and vulnerable consumers, examining whether these customers are excluded from participating fully in ?nancial services and whether they end up paying for the privilege.

 The scale of the challenge
 Dealing with vulnerable customers represents a signi?cant challenge for the industry, and the scale is evident when we consider the following statistics:
 • 1 in 8 adults care for a relative or friend
 • 1 in 6 people over 80 have dementia, with only 43% of sufferers formally diagnosed
 • 1 in 4 people, in any given year, will experience a mental health disorder
 • 1 in 7 adults have the literary skills that are expected of a child of age 11 or below
 • Just under half of UK adults have a numeracy attainment age of 11 of below

 The challenges firms will face
 The regulator is challenging the industry’s preconceived ideas of vulnerability which, although extremely important, will make it difficult for firms to comply with regulations. The elderly widow with low financial literacy and disability that impacts her cognition is not where vulnerability ends. The Financial Lives Survey suggests that 50% of people in the UK show characteristics of potential vulnerability, with the figure increasing in particular regions and rising to 69% in the over 75s.

 If you have taken the tube in London, you will know that the seats nearest the doors are for priority passengers and some are marked with the words ‘not all disabilities are visible’. We would assume that anyone occupying the seat would be mindful of other passengers and able to identify when to give up the seat, balancing this with the potential to cause offence. This feels like a good analogy, to which most of us can relate, of the challenge that the financial services industry needs to overcome.

 An interesting example is digital scams, with 32% of victims falling in the 25-34 age category and half of those educated to University level. This is skewed by the number of interactions taking place in the digital environment by age, but it is digital engagement that represents a real challenge to dealing with vulnerable customers. Firms have rightly transformed their business models for the modern age, but the advent of apps, online banking and automated advice proposition has removed the human interaction from the majority of ?nancial service transactions. It was in this human to human contact where our emotional intelligence, empathy and human connection had the best chance of spotting the signs that someone was vulnerable.

 As Transport for London has acknowledged with its seating, we cannot presume that all vulnerability issues are visible, or that customers are self-aware of their vulnerability. Equally, if individuals are aware, it is not innate within our culture to actively disclose it. Vulnerability can be hidden or obvious, temporary or permanent, and can manifest itself in numerous ways. This ranges from capacity and financial literacy through to health issues and life events such as redundancy, bereavement or divorce. The Financial Lives Survey also refers to people’s low resilience in the UK, citing that 10% of adults could cover living expenses for less than a week if their income or expenses moved in the wrong direction.

 In my experience in financial services, I’ve often heard groans about the regulator’s lack of prescriptive guidance on how to be compliant. Vulnerable customers, given the issues outlined above, will take this challenge to a whole new level. How do you recognise a customer’s vulnerability if it’s hidden? How do you spot the signs of vulnerability when someone is transacting online?

 How do we record and deal with temporary vulnerability, so as not to offend?

 These are critical questions that the industry will need to confront and the answers aren’t mechanical, procedural or definable in a process. A follow up article will look at how regulatory technology may be able to help and will explore other ways that firms can support vulnerable customers.

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