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Out-Law Analysis 6 min. read

FCA to apply 'vulnerability lens' to regulation

The UK’s Financial Conduct Authority (FCA) is seeking to change the behaviour of financial services firms to protect vulnerable customers.

The FCA has published its latest guidance consultation and feedback statement (109 page / 1.7MB PDF) on the fair treatment of vulnerable customers in the wake of an initial consultation in July last year. The latest consultation document discusses the feedback received by the FCA to its initial consultation and seeks views on the updated draft guidance and cost benefit analysis.

The regulator said that although the latest consultation was delayed due to intervention work resulting from the coronavirus pandemic, the new guidance was “more relevant now than ever”. The paper will serve as a reminder to financial services firms that the fair treatment of customer vulnerability should be embedded in their businesses. Firms are expected to treat their vulnerable customers at least as well as their non-vulnerable customers.

The FCA said it would use the guidance to apply a “vulnerability lens” to other supervisory and policy work. Although it will not need the guidance to take action against firms where there is vulnerable customer detriment, complying with the finalised guidance will offer the potential for a safe haven from enforcement action.

Firms should also keep in mind the increasing expectation by the FCA and customers to “put things right” via a remediation exercise when systemic issues are uncovered. This applies equally where vulnerable customers are involved, both in terms of the problem itself which may require remediation or how the scheme itself is carried out.

Developments in the new draft guidance

Respondents to the first consultation were broadly supportive of the proposal to issue some guidance in respect of the fair treatment of vulnerable customers. However, the feedback to last year’s consultation also raised some legitimate questions around consistency, clarity and certainty.

In response to feedback requesting prescriptive minimum standards, the FCA said it wanted to avoid the unintended consequence of “levelling down” where differences in services, firm size and customer base have already created different approaches. It also wants to avoid promoting a “tick-box” approach, or introducing sector-specific rules at this stage, but instead wants to encourage firms to embed the fair treatment of vulnerable customers in their culture in a way that corresponds to their customer base, size and business model.

Whilst the desire from some financial services firms to have certainty is understandable, it seems unlikely that the FCA will introduce any greater degree of specificity or prescription in its approach when it finally comes to publish its guidance. Firms will have to be ready and willing to make value judgements as to whether the steps they are taking with regard to vulnerable customers are proportionate and reasonable and, ultimately, meet regulatory expectations.

The FCA made it clear in the recent consultation paper that it intends to refer to the guidance not only in respect of supervision but also in enforcement cases to assess whether firms could reasonably have understood or predicted that their conduct in question fell below the standards the principles required at the time it occurred.

The guidance will also be relevant to Financial Ombudsman Service (FOS) decisions as the FOS takes account of (but is not bound by) FCA rules, guidance and, where appropriate, good industry practice, when reaching decisions on what it fair and reasonable in all the circumstances.

Whilst the guidance is not intended to be part of the FCA Handbook, firms should not underestimate its status and the way in which the FCA and the FOS will likely use it in respect of their decision-making and interventions. In addition, whilst the FCA has pointed out that the guidance will not apply retrospectively, it has reiterated the point that firms are already bound by the Principles for Businesses. The FOS is taking the same position.

Guidance remains wide-ranging

The consultation paper has reaffirmed the wide scope of the guidance. It will apply to the supply of products and services to retail consumers who are natural persons, including unincorporated businesses such as sole traders and some partnerships.

Although the guidance will not apply to incorporated businesses who may be customers of a firm, the FCA said firms must still meet the standards set by the Principles of Business, and it has reiterated that incorporated businesses may employ individuals with characteristics of vulnerability.

The guidance will also apply to firms who have an indirect relationship with the client, for example firms in a complex distribution chain which carry out regulated activities.

Similarly, the guidance applies to outsourced functions. Firms that outsource functions will be expected to incorporate treatment of vulnerable customers into their initial and ongoing due diligence processes, and may wish to follow up directly with customers to ensure intermediaries explain products clearly and that the customer understands the product.

The scope of the guidance is potentially very broad: it may require firms to look beyond the four walls of their own business and to manage third party providers and outsourcers effectively to ensure customers are treated fairly.

Vulnerability distinction

In response to concern from firms that the distinction between potential and actual vulnerability is unclear, the FCA has indicated a departure from this and, instead, a move towards assessing vulnerability on a “spectrum of risk”.

Firms will be expected to respond to the needs of all consumers along a spectrum of vulnerability, taking care they meet the needs of consumers “at the greatest risk of harm”, but to also “act early to prevent risk of harm growing”.

Whilst this departure may appear to offer some assurance to those firms who questioned the ability to distinguish between potential and actual vulnerability, firms will still have to properly assess their customers and determine where they may fall on the above 'spectrum' so as to respond most effectively. This will, in turn, require firms to have in place properly trained staff who are well equipped to identify and respond to vulnerability. The emphasis on prevention rather than cure will be an important one for firms to keep in mind.

Cost benefit analysis

The FCA said its cost benefit analysis for the guidance was done on a qualitative basis as it considered it impracticable to quantify the benefits to vulnerable customers. It said the benefits of the guidance had now increased due to the increased risk of consumer vulnerability and harm arising from the coronavirus pandemic.

However, the FCA also said the crisis could “potentially increase the elements of firm compliance costs that vary according to the number of vulnerable consumers”.

This presents a serious challenge given the financial pressures firms are already under. But this also needs to be weighed against the potential regulatory cost of not taking proper action in and being exposed to increased FCA scrutiny and enforcement action, as well as adverse FOS decisions.

Firms emerging from the pandemic with revised revenue forecasts should note the FCA's cost benefit analysis and its expectation that compliance costs will rise. They should budget, where they have not already done so, for reviewing their systems and processes in place for treating vulnerable customers fairly, and for investing in resources or skills as appropriate.

The FCA is also likely to monitor whether firms are passing on increasing compliance costs to customers by increasing the price of financial services products. This could result in some customers, potentially vulnerable customers, being priced out in the future of the very products they need.

Looking ahead

The consultation closes on 30 September 2020 and the FCA plans to finalise the guidance later in 2020 or early in 2021.

In its 2020/21 business plan the FCA said it was committed to focusing on the long-term economic impacts of coronavirus on society, including ensuring that the most vulnerable are protected. It said the business plan’s four external priorities – enabling effective consumer investment decisions; ensuring consumer credit markets work well; making payments safe and accessible; and delivering fair value in a digital age – all require "strong action to address issues faced by vulnerable consumers in these areas".

In light of the FCA's external priorities, firms in the investment, consumer credit and payments sectors should be paying close attention to the draft guidance. While many firms have improved or consolidated processes during the pandemic to ensure the right outcomes for vulnerable customers, they will need to continue scrutinising how they accommodate vulnerability in their existing pre- and post-sale processes in line with the guidance and ensure that they follow the guidance when designing new products – particularly in respect of digital customer journeys.

The FCA said it would continue to engage with stakeholders on the treatment of vulnerable customers in 2021 and 2022. In 2023 the regulator plans to evaluate what action firms have taken and whether it has led to improvement, using intelligence gathered through supervisory work and available research.


Jonathan Cavill, Anthony Harrison and Daniela Ivanova are financial services regulation experts at Pinsent Masons, the law firm behind Out-Law

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