Financial Conduct Authority drives change for vulnerable customers

On 29 July 2020, the Financial Conduct Authority (FCA) published draft guidance for firms on the fair treatment of vulnerable customers (GC20/3). This is not based on any new rules or principles, but it sets out the FCA’s expectations of how firms should already be treating vulnerable customers. Firms should review their policies, processes, training and monitoring in light of this guidance to accurately assess whether they are treating vulnerable consumers fairly and meeting the regulatory standards.

What the FCA wants to change

The treatment of vulnerable customers has long been an FCA concern. Despite many firms making significant progress in this area, the regulator thinks there is room for improvement and more consistency across the sectors it regulates. It wants to make sure that the fair treatment of vulnerable consumers is properly embedded by firms in their culture, policies and processes.

The guidance provides clarity and is intended to focus firms’ attention on what they should do to comply with the FCA's Principles for Business, in particular its sixth principle on "treating customers fairly".

Any finalised guidance will support discussions between firms and supervisors about how firms treat vulnerable consumers; and help the FCA hold firms to account if they breach the Principles.

According to the guidance: "It may be relevant to enforcement cases in helping us assess whether it could reasonably have been understood or predicted at the time that the conduct in question fell below the standards the Principles require."

Who will the guidance apply to?

The guidance will apply where products and services are supplied to individuals who are retail consumers and also individuals who are business customers. This includes sole traders and some partnerships. The guidance will apply directly to:

• all firms in a distribution chain carrying out regulated activities regardless of whether they have a direct relationship with the individual customer; and
• functions that are outsourced.

While the guidance will not directly apply where regulated firms provide services to incorporated businesses, it should not be disregarded. For example, insofar as incorporated businesses employ individuals with characteristics of vulnerability, aspects of the guidance may be helpful in helping firms must understand how best to meet the standards set by the principles.

How to identify vulnerable customers

The FCA's previous draft guidance, published in 2019, proposed that, when seeking to treat vulnerable consumers fairly, firms should consider both consumers who are actually vulnerable and those who are potentially vulnerable. As a result of feedback, the regulator has changed its stance, proposing that vulnerability should be looked at as a "spectrum of risk", which firms should be ready and able to respond to.

The regulator recognises that firms can only take reasonable steps to identify and respond to vulnerability, and it does not place obligations on firms to proactively identify individual vulnerable consumers. However, it does promote data analytics, technology and machine learning as aids that firms may find useful in this context, so it would seem that firms are expected to have embedded processes designed to identify and respond to customer vulnerability.

Obligations under the Equality Act 2010

The Equality Act 2010 imposes duties on firms, as "service providers", to ensure that individuals with "protected characteristics" are not discriminated against when using services. It contains a duty for service providers to make reasonable adjustments to ensure that disabled people are not placed at a substantial disadvantage when using their service, when compared with people who are not disabled. Failure to comply with the duty, exposes firms to claims from disabled service users.

Even with the best of intentions, in practice, it can be difficult for firms to know if they are compliant with this duty. In theory, firms first need to establish whether any of their practices place disabled people at a disadvantage (as this is the trigger for the duty to make reasonable adjustments to arise). Next, although firms do not need to predict the needs of every single individual who might possibly use their services, they do need to think in advance (and on an ongoing basis) about what disabled people with a range of impairments might reasonably need (for instance, people with a visual impairment, hearing impairment, mobility impairment or a learning disability). Finally, where the duty does arise, firms are required to take such steps as are reasonable to have to take to avoid the disadvantage.

Here the guidance is helpful. The FCA acknowledges the overlap between the characteristics of vulnerability set out in the guidance and the protected characteristics defined in the Equality Act; and it is clear from the guidance that, for FCA-regulated firms, whether or not they think that a duty to make reasonable adjustments arises, they should be encouraging customers to talk to them about their needs and actively promoting the support services that they have available. This might involve, for example:

• placing signposts on the firm's website indicating how a customer can easily notify the firm of a change in circumstances;
• accommodating ways that a customer can do this while avoiding a challenging conversation (for example, via email or instant messaging);
• asking questions about needs and preferences across key points of the customer journey, such as when taking out a new product or service;
• using targeted online questions and FAQs or open-text boxes that encourage customers to volunteer any relevant additional information; and
• building in online tools that flag support available from a human adviser if customers display certain behaviours, such as hovering for a long time before inputting information, pressing help buttons, or entering inconsistent information.

To do checklist

1. Exercise judgment: Firms will need to use their judgement to consider what each section of the guidance means for them and what they should do to ensure they treat consumers fairly – this should not be treated this as a tick-box exercise.
2. Review culture, policies and processes: As always when it comes to FCA principles, it is down to firms to ensure that they can demonstrate how their culture, policies and processes ensure the fair treatment of all consumers in their target market or customer base, including those who are vulnerable. Their understanding of the needs of vulnerable customers should be embedded in product, service and process design and communications.
3. Deliver staff training: The FCA recognises that it may not be proportionate to send all staff on vulnerability training courses. Instead, firms should consider updating existing training to reflect how the fair treatment of vulnerable consumers is relevant to their role.
4. Check systems and functions: Firms should set up their systems and processes in a way that will support and enable consumers to disclose their needs.
5. Assess product service and design: Firms should consider the needs of vulnerable customers at all stages of product and service design: idea generation, development, testing, launch, and review.
6. Evaluate the customer journey: Firms should respond to the needs of vulnerable consumers at all stages of the customer journey, including the sale of products and services.
7. Learn and improve: Firms should be continuously monitoring and learning - what activities and processes work well? what needs to be adapted to improve the outcomes for vulnerable consumers?

When will it take effect?

The guidance consultation closes for comments on 30 September 2020 and will take effect when it is issued. There will not be an implementation period.

While the guidance itself will not apply retrospectively, firms should be cognisant of the fact that they are already bound by the obligations set by the principles.

What happens next?

The FCA plans to finalise the guidance later in 2020 or early in 2021. Stakeholder engagement, including firms’ treatment of vulnerable consumers, will continue in 2021 and 2022, during which time the FCA will consider whether further proactive supervisory work may still be needed.

In 2023, the FCA plans to evaluate what action firms have taken and whether improvements had been seen in the outcomes experienced by vulnerable consumers.