Author: Jonathan Barrett, CEO of Comentis
Consumer Duty, the Financial Conduct Authority’s (FCA) initiative to protect customers including those who are vulnerable, has been in place for a little over six months now. Jonathan Barrett, CEO of Comentis evaluates how consumer finance firms are coping with their vulnerability assessments and what the regulator will want to see next.
We’re six months in from the FCA’s Consumer Duty regulations coming into force, and in general, we’re seeing a mixed bag in terms of how firms are faring with their vulnerability assessments. Some firms are doing well and making traction, whilst others seem to be struggling somewhat.
Perhaps most worryingly of all, there still seem to be a small number of firms who feel that they don’t need to change their ways of working in line with their Consumer Duty obligations. Some, for instance, might think that being smaller means they’re safe from the Duty or that it doesn’t impact their sector specifically. But whilst it may be true that the FCA will focus most of its attention on the largest players, the regulator has been very clear that there will be no exceptions made, and likewise that no industry is exempt.
Consumer Duty – the requirement to protect customers, including those who are vulnerable – has a fundamental impact on all firms providing regulated financial products or services to consumers. It requires firms to act to deliver good outcomes for their retail customers and ultimately keep them safe.
Consumer Duty will have a fundamental impact on all retail consumer creditors offering a finance plan. Regardless of whether the purchase on credit is big or small, from buying a car to a pair of glasses, all firms must ensure they can identify each and every instance of vulnerability and provide ‘good outcomes’ for their customers and the appropriate support.
The impact of this on the UK consumer finance market is huge. Take the motor finance market for example, the rate at which cars are being bought on finance shows no sign of slowing, with the average sum borrowed in the UK for a new vehicle shooting up from £11,964 to £25,039 in the space of just 13 years.
With such large amounts being spent, and with the cost-of-living crisis putting household budgets under significant pressure, it’s vitally important that potential customers are accurately assessed for any risk of vulnerability before they’re offered any form of finance arrangement.
But what is vulnerability exactly?
The FCA defines vulnerability as:
“Customers who, due to their personal circumstances, are especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care. Firms should think about vulnerability as a spectrum of risk. All customers are at risk of becoming vulnerable and this risk is increased by characteristics of vulnerability related to 4 key drivers.
• Health: health conditions or illnesses that affect ability to carry out day-to-day tasks.
• Life events: life events such as bereavement, job loss or relationship breakdown.
• Resilience: low ability to withstand financial or emotional shocks.
• Capability: low knowledge of financial matters or low confidence in managing money (financial capability). Low capability in other relevant areas such as literacy, or digital skills.”
Vulnerability could stem from illness, divorce or low resilience – triggers that have all been defined by the FCA – as well as from a threat to someone’s income or their suitability for credit. It’s the emotional, mental and cognitive response to these circumstances that leaves someone vulnerable, and as such, they must all be correctly identified.
Undoubtedly the identification process is complex, even for a trained clinician, but for sales professionals who lack an in-depth knowledge of the nature of vulnerability, identifying at-risk customers will prove an incredibly difficult task without technological support.
The other thing to keep in mind is that this is not a once said and done thing. Time and again the regulator has made it clear that Consumer Duty is not a one-off exercise, reminding us all that firms will need to make sure they are continuously learning and improving.
Nisha Arora, Director of Cross Cutting Policy and Strategy at FCA:
“It’s something that needs to become part of who you are as a firm, your culture, and how you do business, running across your whole organisation from Board to front-line delivery, from product design to communications and customer support.”
To do this though, data is key.
Those that are starting to make traction have started to build up hard data on vulnerability. Six months in, we believe that there’s a real opportunity for these firms to assess what they’ve gathered so far, take stock, and see if their target market assumptions are playing out as expected. And if any vulnerabilities have been identified, they could also look at how well that individual customer has actually been supported. With this knowledge, they can then determine whether their preparations were fit for purpose or if there are changes required and then develop from there. Of course, the FCA is not expecting a transformation overnight, but it is expecting organisations to build their banks of vulnerability data and learn and adapt based on this.
The best way to achieve this is with data and a systematic process for screening clients and appropriate accommodations for the needs of those at risk. By combining clinical expertise with hard data, these kinds of solutions can remove bias and subjectivity from the process, ensure consistency across a whole client base and reassure firms that their systems will adequately meet the scrutiny of regulatory requirements.
In the long run, this is a process that will benefit everyone. If you’re struggling, or if you know that you need to bring in additional expertise, don’t delay any further.
