Out-Law Analysis | 28 Apr 2020 | 11:01 am | 10 min. read
In its Covid-19 guidance for firms, the Financial Conduct Authority (FCA) has said that they should be “clear and transparent and provide support as consumers and small businesses face challenges at this time”. Those challenges will inevitably affect an expanding constituency of vulnerable customers whose needs may become increasingly complex both during the immediate crisis and beyond.
The issue of vulnerable customers has understandably received particular attention in the Covid-19 guidance produced by the FCA to date, and has since been underscored by both the FCA and the Financial Ombudsman Service (FOS) in their recently published business plans for 2020-21. The FCA has made it clear that, during the pandemic, it will protect the most vulnerable, ensuring that they can get the financial services and the help that they need. This feeds into its priorities for the year ahead which include, for example, work on unaffordable credit in relation to the suitability of creditworthiness assessments to identify if consumers are being provided with credit they cannot reasonably repay.
Similarly the FOS, in its own business plan (42-page / 1.2MB PDF), also recognises the challenges to vulnerable customers. Some of the significant trends and issues it expects to see in casework include “vulnerability in its broadest sense, as cross-sector conversations continue about how it arises and how to identify and address it”.
Of course, this focus on vulnerability is not new. Last year, the FCA proposed cross-sector guidance on the fair treatment of vulnerable customers and started a consultation process. In a 2017 survey (201-page / 8.4MB PDF), the FCA found that 50% of UK adults display one or more characteristics of potential vulnerability, such as poor health or disability, low financial resilience or capability, or having been affected by a major life event such as bereavement or relationship breakdown. The FCA also highlighted that vulnerability can be transient as well as permanent.
As the pandemic impacts people’s health, families, employment and finances, we would expect the proportion of vulnerable or potentially vulnerable customers to increase considerably from the 50% figure, bringing into sharp focus the need for firms to remain alert to the needs of such customers during the pandemic and beyond. Although the consultation process is on hold, the FCA has made it clear that its draft guidance does not create new rules, but simply clarifies how existing rules apply to vulnerable customers.
Navigating through the FCA’s announcements, as well as those that will be published over the next few months, will be challenging for financial services firms given the uncertain economic environment in which they are currently operating. Those firms which are adaptable and remain alert to their regulatory responsibilities will be likely to be best placed to manage the current challenges, and to learn lessons from them for the future.
The pandemic effectively has the potential to assist with creating a new standard in the treatment of vulnerable customers, with firms that are able to embed doing the right thing for these customers into their culture now potentially able to exceed the standards and expectations that existed before the pandemic. This will not only be a positive outcome for the firm itself from a commercial and reputational perspective, but will also mitigate the risk of potential regulatory intervention in the future.
Inevitably, the pandemic has placed considerable financial pressure on consumers and small businesses. For individuals, these pressures include job insecurity, investment and pension depreciation and other financial uncertainties. The government has sought to alleviate these pressures through a range of different measures, supported by FCA guidance.
In respect of consumer credit - an area where vulnerable customers may be particularly exposed - the FCA has said that it wants firms to “show greater flexibility to customers in persistent credit card debt”. In particular, firms dealing with these customers should allow them more time to respond to communications, rather than observe the timeframes under the FCA’s rules where these result in an earlier deadline for the firm to suspend the customer’s card if the customer has not responded.
Previously, we shared our thinking on how consumer lenders can continue to treat customers fairly while making and implementing plans in response to the pandemic. Since then, new guidance in relation to credit cards, overdrafts and personal loans came into force on 14 April. Notably, firms are requested to “take account of the particular needs of their vulnerable customers” when implementing this guidance.
The FCA has also issued guidance for mortgage lenders and administrators. It is also seeking to extend this guidance to mortgage ‘prisoners’ outside of its regulatory perimeter. Firms should grant customers experiencing payment difficulties due to circumstances relating to the pandemic a three month payment holiday unless the customer requests a shorter term and, regardless of whether there are coronavirus-related difficulties, should not commence or continue repossession proceedings unless the customer requests this. In both cases, the FCA expects firms to communicate clearly with customers so that they understand the implications of a payment holiday or suspending repossession. Firms will need to be mindful of existing and potential vulnerability when communicating with customers in such challenging situations.
Insurance providers may also want to consider premium holidays and changes to their claims and complaints processes if they haven’t already, given the FCA’s primary expectation that firms do the right thing for their customers.
The pandemic has inevitably prompted firms to review and reassess different product lines and the associated policy or contractual literature. However, the need for communication which is clear, fair and not misleading to customers will remain just as important as it was before the pandemic.
For example, while the FCA has acknowledged that general insurers will be trying to manage their exposure to risks by introducing policy exclusions on renewal or suspending certain products, it expects firms to treat customers fairly, act in the customer’s best interests and be clear, fair and not misleading in their communications. See our Out-Law analysis of the FCA’s expectations of insurers during the coronavirus pandemic.
In the context of investment services, the FCA has said that it will continue working with firms (5-page / 74KB PDF) and consumer organisations to understand how the pandemic is affecting markets and the harms that consumers may face. It has relaxed the requirement for portfolio managers to inform investors every time the value of their portfolio has fallen by 10% or more, provided that certain conditions are met, until 1 October 2020. However, the FCA expects firms to continue to comply with their obligations on client identity verification, using the flexibility built into the rules.
The FCA expects that many customers will be concerned about falls in the value of their investments and will seek information and support from financial services firms. It recently provided guidance on how firms that do not provide advice may answer queries arising due to the pandemic without making personal recommendations, but clarified that this guidance is not intended to be of longer-term application. The guidance states that communications “bringing out relevant considerations the customer should bear in mind would not amount to a personal recommendation, as long as it is clear from the language and context of the message that the firm is looking to ensure the customer makes a considered and informed decision”.
The FCA has published similar guidance in respect of queries addressed to pension providers. In both cases, the FCA has provided example language for firms to refer to when developing their own approach.
It is clear from the FCA’s guidance that its expectations in respect of the provision of suitable advice are unaffected by the pandemic.
For example, in its guidance for the pensions sector, the FCA says: “given the difficult choices faced by consumers, it is as critical now as ever that consumers have access to appropriate pension products and are supported to make well-informed retirement income decisions.
The FCA anticipates that the coronavirus crisis will result in more consumers taking advice about transferring out of their defined benefit (DB) pension scheme to a defined contribution (DC) pension scheme. It warns that, even where it is difficult to get information about a consumer’s personal or financial circumstances, or about their pension schemes or other investments, firms must not make a personal recommendation if they do not have all the necessary information. The FCA expects firms to address misconceptions consumers may have as a result of the crisis and, where a consumer wants to transfer their pension against earlier advice, firms should ensure the consumer understands the advice they were given.
In addition, financial advisers are reminded of the FCA’s recent ‘dear CEO’ letter, in which the regulator set out the areas of concern on which it intends to focus over the next two years, along with the actions it expects firms to undertake. Financial advisers need to continue to ensure that the advice they are providing is suitable, bearing in mind the needs and objectives of their customers.
Financial firms of all types need to be aware of the increased risk of fraud and scams. The FCA recently issued a warning to consumers about coronavirus-related scams, explaining that major events like the pandemic “can initiate new types of scam activity”. Scams in the financial services sector are often particularly nuanced, and tend to target people who are more vulnerable or susceptible to being scammed.
Firms should remind consumers to be aware of the possibility of fraud, and protect their personal data. Firms will also need to ensure that their financial crime and prevention policies, and their systems and controls are robust and up to date, including having sufficient suitably trained staff to spot vulnerable customers. Failure of systems and controls may lead to the firm being held liable for losses arising from scams, and potentially expose them to FCA enforcement action.
A firm’s ability to treat its customers fairly is closely intertwined with its operational resilience. Firms that are not operationally resilient are arguably less likely to be able to treat their vulnerable customers fairly.
In its general coronavirus guidance for firms, the FCA states that it expects all firms to have contingency plans to deal with major events and that those plans have been tested. More specifically, in its coronavirus guidance for insurers, the FCA warned that firms should consider the impact that staff absence and the need to ensure staff wellbeing will have on continuity of service and the need to mitigate the effect of staff absence or inability to use business premises.
The FCA has also referred firms to its recent consultation paper on operational resilience, in which it warns of the impact that reliance issues can have on vulnerable customers: “including the continuance of access to key financial services”. Customers may be using online or telephone banking services more than usual, and some for the first time - but firms should continue to assist vulnerable customers online or over the phone.
FCA solo-regulated firms are not required to put in place a single senior manager under the Senior Managers and Certification Regime (SMCR) responsible for their coronavirus response, although it should be clear how responsibility for business continuity and the impact of the coronavirus on the firm is allocated among senior managers. Firms should also consider the FCA’s statement on the senior manager responsible for their ‘key workers’, if applicable. The FCA says that firms’ internal records should aim to keep a “running commentary” of their senior managers and their responsibilities during this period, and that these records should be available if the FCA requests them.
Firms should also consider whether responsibility for helping vulnerable customers needs to be further clarified within the firm.
Beyond the immediate challenges presented by the Covid-19 crisis, there is a good chance that many of the responses and innovations that have arisen during this time stay with the market in the longer term.
Overall, financial services firms may take an increased “fairness” approach to their products and services in the future. The pandemic has caused a monumental shift by businesses going beyond what is merely in their commercial best interests, as everyone comes together to face this challenge. These behaviours amplify what the FCA has already sought to achieve with its focus on culture.
Where firms have taken steps to do more for vulnerable customers, we expect those changes may continue. It will be hard to turn the dial back once a business has decided to make these changes, whether because of customer, regulator or employee expectation.
We may see, amongst other things:
Jonathan Cavill is a financial services contentious regulatory specialist at Pinsent-Masons, the law firm behind Out-Law. Co-written with Anthony Harrison and Daniela Ivanova, also of Pinsent Masons.
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