Background

The new Consumer Duty rules will require all firms to review and enhance existing Treating Customer Fairly processes, and rethink their approach to ensuring good customer outcomes. Consumer Duty has a much greater expectation of a proactive and risk-averse approach to pre-empting and preventing customer harm.

Firms should not underestimate the significance of the new Principle requiring them to deliver good customer outcomes and what this will mean in the context of their approach to vulnerable customers.

Across the Consumer Duty rules and guidance the FCA has specifically called out requirements for firms to take proactive steps to:

• Ensure that customers with characteristics of vulnerability are receiving outcomes that are as good as outcomes received by other customers.

• Ensure that they understand the financial objectives of vulnerable customers and are tailoring products and services, communications and support accordingly to avoid foreseeable harm and support customers in pursuing their objectives.

• Offer products and services that meet the needs of customers with characteristics of vulnerability, provide fair value, avoid causing foreseeable harm and support them in achieving their financial objectives.

• Ensure that communications are understood by customers with characteristics of vulnerability and their approach to monitoring identifies where communications are not being understood and modifications and / or remedial activity are required.

• Provide customer support that is suitable for customers with characteristics of vulnerability and enables them to make full and effective use of products and services.

• Ensure that governance and reporting arrangements are promoting awareness of characteristics of vulnerability and any significant or systemic issues concerning vulnerable customers, at a senior level.

Meeting these requirements will require firms to assess the processes and controls across their operations.

Firms need to act now

The Consumer Duty standards (for new and existing products and services that are open to sale or renewal) come into force by the end of July 2023. However, the FCA has said it will not wait for Consumer Duty requirements to come into force before it acts to improve consumer outcomes where it considers that a firm is not meeting its existing regulatory requirements. Any significant issues identified during implementation will need to be addressed quickly.

Key areas for consideration

What follows are some key areas where we recommend firms should be focusing their implementation efforts in relation to the Consumer Duty requirements for customers with characteristics of vulnerability.

Product governance

Firms will need to review and update product governance arrangements to ensure that customers with characteristics of vulnerability are given due consideration at every stage of the product design, review, and testing process.

For every product and service that falls within the scope of Consumer Duty firms will need to consider:

• What characteristics of vulnerability exist within the target market?

• What are the needs of customers with the identified characteristics of vulnerability?
• Is the product or service designed to meet those needs?
• What are the risks to customers with the identified characteristics of vulnerability?
• Is the product/service designed to mitigate those risks?
• What are the costs of the product or service to the customer, including non–financial costs?
• Having regard to the benefits of the product or service, does it provide fair value for customers with the identified characteristics of vulnerability?
• Are the characteristics of the vulnerability identified within the customer base aligned with the identified target market?

Where it is identified that the product or service is not meeting the needs of vulnerable customers, firms must take appropriate action to mitigate the risk of harm.

Customer interaction

Meeting the consumer understanding and consumer support outcomes will start with a more granular assessment of characteristics of vulnerability within the target market, having regard to the four drivers of the vulnerability identified by the FCA.

For all identified characteristics of vulnerability, firms will need to consider:

• What are the potential/likely impacts? 
• What is the detriment/risk of detriment?  
• What are they currently doing to support customers in those circumstances?
• Where do they need to do more to protect vulnerable customers from harm and ensure they receive outcomes that are as good as outcomes for other customers?

This is likely to involve a review of the firm’s existing suite of communications, customer support channels, and frontline operational processes to ensure that they meet the needs of the firm’s customer base, including customers with characteristics of vulnerability.

Staff training

Given the nature of some types of vulnerability and the sensitivity of the topic, firms should consider training that brings the topic to life such as role-play exercises, case studies, and speakers from relevant charities and other organisations.

Firms should also proactively seek staff feedback on training, as well as use the MI produced through ongoing monitoring activity to continually enhance their training programme and ensure that it is appropriate for the firm’s customer base and product and service offerings.   

Systems and technology

Whilst, not every firm will require sophisticated technology, all firms should consider how they can use technology to support them in meeting and demonstrating adherence to their regulatory requirements. In addition to supporting firms in identifying vulnerability through applications such as keyword spotting, systems, and technology provide opportunities for:

• Self-disclosure - Enabling customers to self-disclose characteristics of vulnerability can alleviate some of the pressure on frontline staff and provide customers with an opportunity to tell the firm in their own words exactly how the firm can meet their needs. Firms can take these learnings and consider how they can use them to make overall enhancements to processes, systems, and controls that will benefit their broader customer base.
• Record keeping – Capturing and retrieving information about vulnerability during subsequent customer interactions can be an effective way of avoiding the common customer frustration of having to explain themselves multiple times to different customer support agents, as well as ensuring that support provided is appropriately tailored to the customer’s identified needs during all interactions.

Equally, firms should consider whether the technology used in their current distribution channels may present an increased risk to vulnerable customers. The vulnerability of financial unsophistication is an often overlooked concern, and firms with online-only channels should be prepared to evidence and justify that they are confident customers understand the process and are making informed decisions.

MI and monitoring

Without effective monitoring and appropriate MI that is fit for purpose, firms will not be able to effectively demonstrate that they are meeting their requirements under the new Consumer Duty.

We suggest that firms start by mapping their existing MI/monitoring activity to the four Consumer Duty outcomes and the overarching requirement to deliver good customer outcomes in relation to customers with characteristics of vulnerability. This will enable them to identify where additional MI/monitoring activity is required and incorporate uplifts into existing compliance frameworks and monitoring programmes.

In order to evidence that as a group, customers with characteristics of vulnerability are not experiencing poorer outcomes than other customers, the data captured will need to be sufficiently granular. For example, complaints data will need to be scrutinised to ensure that there is not an overrepresentation of customers with characteristics of vulnerability. Where an overrepresentation is identified, additional data should be obtained where required and root cause analysis performed to identify the underlying cause.

Governance and reporting

Impressing the regulatory significance of Consumer Duty onto staff is a task that starts at the top and senior personnel should make clear their commitment to putting good customer outcomes at the heart of the business.

Reporting lines will vary depending on the size and structure of the firm. However, firms need to consider how they will ensure that the Board and relevant senior personnel have sufficient awareness of issues that may impact the firm’s ability to comply with Consumer Duty requirements. Where issues are identified, there needs to be clear accountability, prompt remedial action, and robust record-keeping.

Whilst firms should review all policies and processes to ensure alignment with Consumer Duty requirements, they should pay particular attention to those processes that the FCA regards as most indicative of culture, which includes the firm’s approach to the identification and treatment of vulnerable customers. Firms should also review their reward and incentive policies to ensure alignment with Consumer Duty requirements and to incentivise behaviours that are conducive to a culture that promotes good outcomes for all customers.

Going forward

Following the implementation period, firms will need to give ongoing consideration to the interpretation of Consumer Duty requirements. This will include having regard to supervisory and enforcement action taken by the FCA and consideration of determinations made by the Financial Ombudsman Service in order to continually improve their approach to reflect what the regulators consider to be good practice and mitigate the risk of consumer harm by avoiding poor practices.

Given the nature of the new requirements, firms will need to use the outcomes of the monitoring activity they perform to inform ongoing enhancements to their processes which will continue long after the implementation period has passed.  

Next steps

The above is just a summary of the types of activity that firms should be undertaking in order to implement the Consumer Duty requirements for customers with characteristics of vulnerability. It will be for each firm to determine exactly how they implement the requirements to fit their individual business model, having regard to the overarching requirement for good customer outcomes.

For more bespoke support with the implementation of Consumer Duty tailored to your firm’s individual business model, please contact Lisa Davey and Mark Aengenheister.

Authored by Lisa Davey.