Out-Law News 3 min. read

FCA finalises guidance on fair treatment of vulnerable customers

The UK’s Financial Conduct Authority (FCA) has issued finalised guidance for firms on how to treat vulnerable customers, completing work that began as far back as 2013 and firming up the draft guidance issued to firms in July 2019.

The FCA has linked the guidance on vulnerable customers to its Principles for Business, making it clear what the standards set by the principles mean for firms. The guidance sets out what firms should do to meet those standards.

However, the regulator said firms were not bound to adopt or follow any of the specific actions described in the guidance (57 page / 855KB PDF), but must meet standards set by the principles and treat customers fairly.

The guidance will support the FCA as it moves forward in applying a ‘vulnerability lens’ to supervising and enforcing the standards set by its principles and rules. Firms will need to demonstrate to the FCA how their business models, the actions they take and their culture ensure the fair treatment of all customers, including vulnerable customers.

Financial regulation expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law, said: “While there will still be areas of some concern to firms and customers alike, the positive is that the guidance has now been finalised and therefore a more cemented position on firms’ Principles obligations regarding vulnerable customers exists.”

The guidance sets out firms’ obligations to protect vulnerable customers in key areas: understanding the needs of vulnerable customers, the skills and capabilities of staff to recognise and respond to customer vulnerability, and taking practical action.

This makes it clear firms need to embed the fair treatment of vulnerable customers across their entire workforce, and also protect staff who are dealing with vulnerable consumers. Firms need to understand the nature and scale of characteristics of vulnerability that exist in their target market and customer base, and ask what types of harm or disadvantage their customers may be vulnerable to.

The FCA said firms should take action to protect their client base when they were designing products, setting up customer service systems and processes, and communicating with consumers. Firms also need to monitor and evaluate their progress against the guidance, the FCA said. This included implementing additional processes to evaluate where they have not met the needs of vulnerable consumers, so that they can make improvements; and regularly reviewing management information on the outcomes they are delivering for vulnerable consumers.

Cavill said the finalised guidance had evolved from the draft guidance issued in July 2019, with helpful changes particularly around distribution chains and digital channels, as well as the benefit of case studies and examples of good and bad practice.

“Overall, the guidance is more targeted and easier for the firms to see how they can implement, or continue change, in this space. Further, the FCA has made it clearer on how it intends to supervise firms on the topic, which gives clarity, but in essence repeats the overall position that this is very high up the regulator’s agenda and non-compliance is unlikely to be tolerated,” Cavill said.

“The guidance also emphases the importance of flexibility and agility in responding to customers’ vulnerabilities but also at an operational level within firms. Rigid structures and approaches will not be able to keep up with the transient and fluid nature of the issues in play. Technology solutions as well as collaboration within and beyond the financial services industry will be crucial to success. Utilising the FCA Sandbox could be helpful here for some firms,” Cavill said.

Cavill said the guidance could also be used against firms.

“There is an obvious risk of claims management companies and opportunistic litigants ‘weaponising’ the guidance to bolster complaints which may not ordinarily succeed. That risk will need to be managed as there will be legitimate circumstances where redress should be owed to an affected customer. The FCA can also look to the guidance when considering actions under its Principles” Cavill said.

“Firms should not be apprehensive of investigating and assessing complaints fairly under the Dispute Resolution: Complaints Sourcebook. The FCA and Financial Ombudsman Service will need to keep an eye out for this issue gaining traction, particularly as claims management companies look to hedge the losses they will suffer from commission restrictions if the relevant FCA proposals on that are implemented,” Cavill said.

The FCA carried out two surveys last year to assess how many financial services customers could be classified as ‘vulnerable’. It found that the number of vulnerable consumers increased 15% over the initial months of the Covid-19 pandemic in the UK, and now stands at 27.7 million.

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