Simplifying customer vulnerability without being simplistic | Insight from MorganAsh’ Andrew Gething

As the industry pushes for regulatory simplification, customer vulnerability risks being reduced to overly simplistic processes. Sharing his latest thinking with IFA Magazine, Andrew Gething, managing director of MorganAsh, argues that firms need structured, data-driven approaches to properly identify, monitor and support vulnerable clients under Consumer Duty.

In recent months, there has been much discussion across financial services about simplification. The FCA wants to make sure that rules are relevant and both easier to understand and implement, while many in the industry – particularly smaller firms – are keen to minimise the burden of compliance.

In truth, Consumer Duty has already done some of the heavy lifting, helping to remove rules that are now no longer needed – particularly in the insurance sector – or negate the need for additional regulation entirely. Furthermore, proportionality serves as a central strand of the principles-based approach of Consumer Duty, encouraging smaller firms to integrate it in a way that best suits their resources, client base and product complexity.

Even so, it’s often the case that simplification strays into simplistic – especially when it comes to customer vulnerability. It’s no secret that this is the hardest part of Consumer Duty – and an area where firms are falling short. Whether it’s through complacency or a lack of either knowledge or information, customer vulnerability is often reduced down into something much narrower than it is.

Where approaches often fall short

Perhaps the best example is treating vulnerability as a binary flag – a ‘yes’ or ‘no’ flag on a customer record. This approach doesn’t offer the nuance needed to truly understand the customer’s situation, how severe the issue is and what support is required. Some firms rely on free-text notes or an individual’s judgment, neither of which is subjective – and both are difficult to analyse and report on.

There’s also the tendency to focus on physical vulnerability like a disability. Consumer Duty forces us to think in far broader terms to consider less visible difficulties, as well as financial challenges, life events such as divorce or bereavement, lifestyle concerns or the person’s capability to engage – among many others.

Linked to this is assuming a vulnerability is static. In reality, it can change quickly. A customer coping well today could face a major challenge tomorrow. Likewise, a life event such as redundancy, divorce or bereavement will create a period of vulnerability that will likely improve. Without regular assessment, firms risk applying a permanent vulnerability flag or missing emerging issues and unable to pivot products or service to provide a better outcome.

Also, firms who only have a simple flag – without a record of previous issues – may not understand or see that this flag being added and removed on a regular basis – or be able to evidence if the flag was present when the product was purchased or during other interactions. Evidence, as required by the FCA, requires a record of vulnerability over time – not a snapshot.

Often, simplistic approaches focus solely on disclosure or rely too heavily on one particular channel or customer subset – such as claims and complaints. These might be a good place to start, but shouldn’t be a firm’s sole effort. If firms don’t have a broader view of their entire customer base or only identify vulnerability when someone explicitly says so, it’s all too easy for cases to go unnoticed.

There are plenty of other instances where customer vulnerability is viewed in a simplistic way – whether it’s considering vulnerability at an individual level, without recognising the influence of household dynamics, or neglecting the very real reality of multiple simultaneous vulnerabilities.

Finding the balance

In reality, simplification can be found through structure and insight, rather than reduction.

A structured approach to customer vulnerability – built on objective assessment – allows firms to identify and record customer vulnerability in a consistent and meaningful way.  With those foundations in place, firms have the robust data needed to monitor effectively across the customer and product lifecycle, as well as to report on, as required by the regulator. Rather than simply counting vulnerabilities, firms can understand a customer’s overall resilience and tailor the products and services accordingly. This is where the commercial benefits of the Duty can start to be unlocked.

Technology plays a critical role here. There are well-designed systems, readily available in the market, which can help firms of all sizes to not just identify and classify, but monitor, support and report on customer vulnerabilities and outcomes. Digital solutions bring consistency and repeatability while driving efficiency and improving oversight.

Knowing how onerous the task is, the FCA has long advocated for tech adoption. Rather than relying on simplistic approaches, firms can adopt structured systems to manage vulnerability more effectively. In the process, they reduce the burden, satisfy the regulator and improve customer outcomes by personalising products and services, and by strengthening the support they offer.

Seeking guidance

Given how much of a stumbling block this has been, it’s hardly surprising to see why the recent guidance from the CII and the PFS has been so widely welcomed. Rather than regurgitating the regulation, it has offered firms a practical roadmap for turning the principles of Consumer Duty into operational reality – including clearer benchmarks for what good looks like when it comes to IT systems, vulnerability classification and data infrastructure.