9th April 2024

How the FCA’s views on ‘vulnerable customers’ can leave advisers vulnerable

Over my time in this industry, from the late 60’s until now, I have seen many changes in the world of regulation, often linked to a new regulator or a new head at the regulator of the day. Think Nasdim, FIMBRA, PIA, FSA, FCA. These have included varying attempts at rules-based regulation, principles regulation, RDR, TCF, DEI and now Consumer Duty. 

Regulation was born out of a very real need and has metamorphized over the decades to be a self-perpetuating example of regulation for regulation’s sake often to justify the regulator of the day’s existence. 

Life is, unfortunately full of unpredictable events, bad things happen to people seemingly for no reason and more rules or increased protection will not stop that no matter how hard regulators may try. 

The firms that all these changes will impact most are likely to be the smaller, less well-resourced, who are still around despite all regulatory attempts to get rid of them.  

Small firms should be able to take comfort that although they have the same responsibility as larger firms it should be proportionate and relevant to the size of the firm. But there is no measure for proportionate. It is in the eye of the beholder, in this case the regulator. 

The FCA, from what I hear,is getting really cross about FG21/1.  I understand from a very reliable source they are ‘beyond disappointed’ that firms haven’t implemented what was asked of them in 2021. 

Having read their guidance note, I am minded to ask, what was wrong with the TCF pathway? At very best this could have been updated at a much lower cost in time for all involved. This is a great example fixing something that I do not believe was broken. 

It comes therefore as no surprise that the FCA are now conducting a reviewthat will look at whether firms they regulate “understand consumer needs and whether their staff have the necessary skills as well as product and service design, communications and customer service, and whether these support the fair treatment of vulnerable customers”. 

The word vulnerable is defined as something or someone that can be easily harmed or affected by something bad. Having now been discovered by the FSA, as it looks to increase fee and fine revenues, it has been given a much wider definition and place in the rule book. The actions it is taking should cause concern for those it regulates. 

The FCA view of vulnerability is seen as “a spectrum of risk. All customers are at risk of becoming vulnerable, but this risk is increased by having characteristics of vulnerability. These could be poor health, such as cognitive impairment, life events such as new caring responsibilities, low resilience to cope with financial or emotional shocks and low capability, such as poor literacy or numeracy skills”. 

The words the FCA needs to concentrate on are “All customers are at risk of becoming vulnerable” because the real risk Consumer Duty presents is to advisers not the customer. 

How do you run a business based on the chance that everybody in your client bank carries a ‘vulnerability risk’ to your own financial survival? 

Life is full of unfortunate, unpredictable events, as I mentioned earlier, bad things happen to people seemingly for no particular reason and more rules or increased protection will not stop that no matter how hard regulators may try.

For some perspective, is a car dealer (now regulated of course) responsible for selling you a car but failed to ask if you had ‘cognitive impairment’ issues in a pre-sale checklist and you subsequently crashed it leaving the showroom as you did not bring your glasses with you? Consumer Duty would suggest it is not the driver at fault but the dealer who sold it.

Financial vulnerability has possibly made worse by the COVID-19 lockdowns, Government paying people not to go to work, the denial of a proper education for their children and an ease of access to additional employment benefits previously not available until COVID-19 hit. 

This year some 9.25m people aged 16-64 were economically inactive, an inactivity rate of 21.8%. Many are registered as disabled, but most are for reasons of mental health. Pensions Minister Mel Stride has said we should not let normal life anxieties (something the regulator now classes as vulnerable) be classified as mental health problems and yet that is exactly what the FCA seems to be trying to do. 

Why is it that for quite a few years the clarion call to ensure fair treatment has extended way beyond what used to be called ‘treating customers fairly’ (TCF)?  Something I think most advisers have been doing very well at over a very long time, without giving it a name or a rulebook entry. 

I am not sure if this is something that the COVID-19 enquiry intends to cover in a module, but, the FCA Financial Lives coronavirus panel survey, carried out in October 2020, “demonstrated that more consumers found themselves in vulnerable circumstances due to the pandemic, with 53% of adults surveyed displaying a characteristic of vulnerability”. The FCA saw this as an “increase of over 3 million from February 2020, and many of these people may have multiple characteristics of vulnerability”.

The FCA goes on to note:

“Not all customers who have these characteristics will experience harm. But they may be more likely to have additional or different needs which, if firms do not meet them, could limit their ability to make decisions or represent their own interests, putting them at greater risk of harm. So, the level of care that is appropriate for these consumers may be different from that for others”.  

The FG21/1 gives examples of identifying customer vulnerability but there are so many of them, here are just 4:

• Health. Conditions or illnesses that affect one's ability to complete day-to-day tasks, both mentally and physically... 
• Life Events. Such as bereavement, job loss or relationship breakdown... 
• Resilience. Low ability to withstand and manage financial or emotional shocks... 
• Capability…

Considering this, and given the impact of retrospective regulation, I’m mindful to ask the FCA:

• If firms are presented with a potential client who ticked one or all the above, should an adviser now a have a psychology qualification added to the list in order to be able to identify specific vulnerabilities? 

• Is there a route map questionnaire that firms can use to determine what is vulnerable and what is not to keep on file? 

• Should firms make additional charges such specialist consultative work when dealing with the added time that may be needed to deal with those in a vulnerable category? 

• If a consumer is deemed to fall into a vulnerable category can the firm refuse to take them on or retain them as a client as in doing so, they could find themselves at regulatory risk at a later date?

• How could this affect PI insurance and the insurers understanding of Consumer Duty risk to charge accordingly? 

All things considered; I don’t believe any firm should have the Consumer Duty responsibility placed at their door in the way it is being asked to.

The Financial Conduct Authority’s business plan for 2024/25 sets out several commitments. The plan, only published this March 19, sets out the regulator's annual funding requirement. This is expected to rise by more than 10 per cent to £755m, no doubt to recoup Consumer Duty costs? 

Their commitments are laid out in 4 key points. 

• Utilising AI for fraud prevention
• Building on consumer duty 
• Developing the UK as a global market
• Problem firms and failures.

It is the latter that causes me most concern as their expectation is that firm failures will not decrease in 2024 despite implementation of Consumer Duty to reduce this.  

One should note in the narrative that “we will continue to use data and horizon-scanning mechanisms to anticipate firms that are at risk of failure and make sure that we can respond appropriately in the event that they do to protect consumers and ensure market integrity”. 

Twelve years on from RDR, we live in a compensation hungry world in 2024? Will consumer duty, a language driven reinvention of treating customers fairly, see yet more firms fail unfairly?

A crystal ball moment 

Just to make matters worse for advisers contemplating the cost and implementation of Consumer Duty, at the end of last year the FCA announced that ‘CapAd” proposals would require advisers  “to calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities to the FCA”. 

This is the regulator sending a message in answer to their key point 4 above, that it believes that firms are very poorly resourced. Could it be that the impact of so much regulation and associated costs is being exposed but instead of addressing the problem it is carrying on with more obstacles?

The idea, as I see it, is that any firm not holding enough capital to deal with vulnerability will be subject to automatic asset retention rules to prevent them from disposing of their assets in anticipation of what may not actually happen. 

This is a recipe for disaster for the SME adviser, I do not know how long it will take the FCA to understand the advice market it regulates?

This will see smaller firms cease trading, bigger one’s getting bigger on a feeding frenzy and supposedly more resilient, providing consumers with higher cost advice outcomes.

It will not see “a thriving financial advice market to make sure consumers can access the support they need from financially resilient advice firms that want to do the right thing".

The problem was that it was always about the advice and never the product. Now the shift is about vulnerability. A pointer to what the outcome of Consumer Duty can be found as of H2 leading to Winter 2023 review of the FCA membership. 

2,792 firms joined the register along with some 9,596 individuals. To the same H2 Winter 2023 date 6,684 firms de-authorised seeing 14,715 individuals calling time on a regulated life*.  

This surely must send a message to the FCA.

Should it be that advisers are ‘beyond disappointed’ because the FCA never listens? And how much should advisers continue to endure before they are, themselves, seen as vulnerable?

Regulation