A vulnerable customer is someone who, due to his personal circumstances, is especially susceptible to harm, particularly when his wealth management firm is not treating him with appropriate levels of care. The UK's Financial Conduct Authority has just published some opinions about the latitude that the firm should show him.
The FCA bases its ideas on a combination of its Principles for Businesses (to be found in PRIN), other vague rules and detailed rules and guidance. PRIN 1. 2.1G states that the extent to which firms meet their requirements under principles 6, 7 and 9 will depend, in part, on the characteristic of the customer concerned. The relevant interests and needs to which firms must have due regard and the nature of reasonable care in the relevant circumstances will depend on those characteristics.
Beyond specific interactions with customers, firms should integrate an understanding of the needs of vulnerable consumers into their business. To meet the requirements of Principles 2 and 3, this means ensuring that the business and staff have the necessary knowledge and skills to treat vulnerable customers fairly. Firms also need to have adequate processes and control systems in place to manage the risk of harm to vulnerable customers.
Good practice, poor practice
Unsupported by references to rules, the FCA has also filled the paper (FG21/1) with its opinions about 'good practice' and 'poor practice.' One firm that elicited its approval introduced the option for new members of staff to become 'dementia friends' during their induction. This happened online through the free Dementia Friends programme. All existing staff, both customer-facing or otherwise, were also invited to regular sessions, supported by Dementia Friends Champions. Staff were also invited to organise Dementia Friends Information Sessions as part of their ‘vulnerable customer awareness training’ that the firm gave to all fron-tline staff.
Firms can hire the training and consultancy team of a large dementia charity to spend time in their offices to observe current practices and relate them to consumers living with dementia. They conduct a training needs analysis of staff and review product literature that the firm uses for people with dementia. Their audit can end in reform.
One real tale of poor practice runs as follows. An elderly consumer who lived alone had been sold credit by a broker during a sale in her home. The lender phoned the consumer as part of its follow-up process before the loan was released and she initially told the firm that she wanted to go ahead with the sale. The lender knew that the consumer was vulnerable and arranged another call to confirm her decision. Despite the consumer changing her mind over several phone calls, she then agreed to proceed and the loan was processed. After this, it transpired that the customer had dementia and, with the intervention of the consumer’s daughter and a lawyer, the lender wrote the loan off. This broker and lender were both responsible for recognising the consumer’s vulnerability and deciding whether the product was suitable for the consumer’s needs and circumstances. Neither the broker nor the lender gave enough consideration to the consumer’s vulnerability and the loan was granted, despite the consumer’s confusion.
In the US, where the Government blazed the trail for rules to protect vulnerable financial customers, the emphasis was and still is on elderly customers, especially those with dementia. Wealthy vulnerable people are mentioned specifically in the rules.
Beyond the FCA's "Principles for Business," which have the force of rules, there are many other rules that firms may need to consider in their treatment of vulnerable consumers.
- Rules and guidance in the Mortgages and Home Finance Conduct of Business sourcebook (MCOB), Consumer Credit sourcebook (CONC) and Claims Management Conduct of Business sourcebook (CMCOB). Sometimes, these books oblige them to take particular care when serving vulnerable customers.
- Rules and guidance in MCOB, CONC and the Banking Conduct of Business sourcebook (BCOBS), which set the FCA's expectations regarding the way in which firms should treat consumers who are unable to make required payments.
- The application of the Senior Managers and Certification Regime or SM&CR.
- The FCA's training and competence regime, set out in TC, the Training and Competence sourcebook which requires the financial services workforce to be properly qualified. This includes the "high-level competent employees" rule in SYSC 5.1.1.
- The Product Intervention and Product Governance sourcebook (PROD) and the FCA's regulatory guide, the Responsibilities of Providers and Distributors for the Fair Treatment of Customers. These are also relevant to the design of products and services.
- The requirements set out in the FCA's Conduct of Business sourcebook (COBS 9 and COBS 9A) for people who provide investment advice to retail clients. Firms must understand and assess the needs of consumers, including vulnerable consumers, in accordance with the suitability requirements.
The rules and guidelines for financial promotions and communications with customers that are in the FCA's rulebook, such as those in COBS, Insurance Conduct of Business sourcebook (ICOBS), MCOB , BCOBS, CMCOB and CONC. Any different or additional communications provided for vulnerable customers must always be in line with existing regulation. Firms might want to refer to the regulator's discussion paper 15/5 for context.
- The Dispute Resolution: Complaints (DISP) rules that require firms to ensure that they effectively apply lessons they have learnt from the decisions of the Financial Ombudsman Service's decisions in future complaint handling.
- The requirements for fairness and transparency under Part 2 Consumer Rights Act 2015 and the Unfair Terms in Consumer Contracts Regulations 1999 (for contracts signed before October 2015).
- The requirements of other consumer protection law, including the Consumer Protection from Unfair Trading Regulations 2008. These prohibit firms from engaging in unfair commercial practices and make specific reference to commercial practices aimed at vulnerable customers.
- Data protection requirements.
- Where applicable, the provisions of the Mental Capacity Act 2005 and the Adults with Incapacity (Scotland) Act 2000. These set out laws concerning mental capacity, including information about indications of mental capacity limitations, how to help people to make decisions and other relevant guidance, for example the guidance at CONC 2.10 in the context of consumer credit.
An expert speaks
Howard Taylor, the regulatory expert at Capco in London, told this publication that the financial services industry has already devoted considerable time and energy to dealing with vulnerability, but firms have long wanted clearer and more robust guidance on the subject.
“The new guidance also narrows the definition of vulnerability, making it more manageable and digestible from a practical perspective. Two aspects should be welcomed in particular. Firstly, it looks at how you take practical action and turn vulnerability into something tangible. Secondly, it looks at proactive intervention into the product space, talking in real terms about the features, benefits and risks of a product and its design. This, combined with a focus on customer service, will be very valuable for vulnerable consumers.
“The FCA’s intervention into product design for vulnerable consumers transforms the approach to vulnerability from a reactive one around managing consequences to a proactive discussion on how you make product design in financial services inclusive. It also brings financial services more in line with the inclusive design concept we see in other industries.
“The interesting challenge of the guidance is how it is implemented by the banks. The risk is that it encourages a more rigid and prescriptive attitude, where vulnerability becomes more of a box-ticking exercise. The more personalised, ‘in the round’ approach that is ideally needed when assessing individual cases could be neglected.”