As 2024 draws to a close, sharing his latest thinking with us, Richard Farr, Non-Executive Director at duty of care assessment company Comentis, looks back on the progress that has been made on financial vulnerability, and offers his thoughts on what 2025 may bring.
It’s been quite the year. The first full-calendar year since Consumer Duty took effect, if I were to offer one thought I would say that 2024 was the year we truly opened the can of worms that is financial vulnerability. And what a catering sized can of worms it is.
One of this year’s most important developments, I would say, has been the increased awareness of just how complicated vulnerability is, and the resulting efforts to determine how we can better meet clients’ needs. That said, while there’s some good work being done, not everyone’s on the same page. Some sectors are doing better than others of course, and – astonishing as it might sound – there are still some firms doing nothing at all.
Those that are trying have spent a considerable amount of time and money putting their own processes together, and none that I have witnessed have been perfected yet. Likewise, the fact that everyone is finding their own solutions to address this shared problem only adds to the complexity. For instance, a mortgage broker, a lender, and a protection provider will all require a customer going through the distribution chain to complete their own unique vulnerability checks. For the sake of that customer, it would be a positive step, in the future, to join everything up.
But broadly speaking, most firms are heading in the right general direction, and there’s undoubtedly some recognition of that from the FCA. What many are still lacking, though, is the depth of thought, the rigorous reporting based on systematic data and the clinical oversight that is required to truly identify all vulnerable circumstances and get closer to that perfect end state.
The FCA’s collaborative approach
Over the past year, significant effort has been put into determining what it means to support vulnerable customers in the way the FCA expects. Now that much of that work has been done, the FCA itself has said that it wants a collaborative relationship with the industry.
While this may be frustrating for some, it strikes me as a shrewd move on the part of the regulator. By letting the issues breathe and waiting to see how the industry rises to the various challenges, the FCA now has a strong foundation with which to move forward.
How does this collaborative approach actually play out, though? Looking to the FCA’s business plan, besides its ongoing objectives there are three major commitments going into 2025, the second of which is to put customer needs first. So this is a major part – an entire third – of the regulator’s strategy for next year. And while this commitment doesn’t just refer to vulnerable customers, ensuring higher standards through Consumer Duty will undoubtedly be a priority. There will also be a review in the spring of firms’ treatment of customers in vulnerable circumstances.
Going forward there will be not one single consultation from the FCA that doesn’t mention identification, communication and ensuring good outcomes for vulnerable people. In short – it’s here and there is no hiding from it. One thing’s certain, though: the regulator and the industry working closely together will surely result in better customer outcomes.
Larger fines
It’s true that the regulator has issued some remarkably large fines this year. That being said, they have not solely been driven by an investigation into those firms’ vulnerability processes. Instead, they have originated with a complaint or a forbearance check, with the end result being that the firm was penalised for not adequately supporting its vulnerable clients as well.
With vulnerability rules now in force, I think this is a sign of things to come in 2025. Any review or investigation will take vulnerability into consideration, and if an issue is found I expect there will be fines – large fines. To that end, firms across all sectors must have processes in place to identify and ensure vulnerable customers receive just as good an outcome as anyone else. And woe betide any firm that is deliberately exploiting customer’s vulnerabilities. They, in particular, will be rained down upon.
That said- and dare I say it – I do think we can expect a small amount of leeway. If the upcoming review of firms’ treatment of customers in vulnerable circumstances finds evidence of bad practice, I imagine the firm will be warned, and required to fix the wrong, rather than immediately fined. But with sanctions materialising soon after for firms that don’t act on those fair warnings.
Reframing ‘vulnerability’
A particularly noteworthy move this year has been the recommendation by many in the industry, including us at Comentis, that advisors should reframe ‘financial vulnerability’ as ‘financial wellbeing’. By adjusting the way we speak about it, the idea is that we are able to better appreciate how there are different states of vulnerability. Rarely permanent some will be temporary, while other might be more sporadic. Thinking of it as ‘financial wellbeing’ helps to acknowledge how diverse the impact can really be.
Ultimately, this change is about appropriately meeting customers’ needs. Instead of trying to ensure that people with additional needs receive good outcomes, surely we should try simply to ensure that everyone receives a good outcome? The thought process here is that talking about ‘financial wellbeing’ will put firms in a better headspace to make this change.
The risk, however, which firms need to be aware of going into 2025, is that taking an ‘everyone counts’ approach may reduce some of the hard-won focus that we’re seeing on vulnerability. Adjusting the language we use could indeed help. But if we’re to avoid calling people ‘vulnerable’, we mustn’t fall into the trap of forgetting that there are indeed customers with additional needs.
Happy New Year
If 2024 has been about opening the can of worms that is vulnerability, then 2025 will be about sorting through those worms and determining how we move forward. From larger fines to closer investigations, things are definitely ratcheting up, and it just goes to show that this issue is here to stay. Firms have to get on top of vulnerability, and they have to keep constantly improving on their processes.
Identification, action and reporting. That is the process that all firms must have in place going into 2025. And to those that are struggling to develop their own systems, the truth is that there’s a simpler, cheaper and – frankly – better way of doing it. A digital assessment, capable of accurately identifying financially vulnerable customers, removing subjectivity from the process and ensuring consistency across a whole client base, is arguably the only way to ensure all vulnerability drivers are constantly in scope. By combining clinical expertise with hard data, they’re able to reassure firms that their systems and controls will adequately meet the scrutiny of regulatory requirements.
That’s my top piece of advice, going into the new year. Rather than reinventing the wheel, simply have a wheel that works. If you’re struggling, or if you know that you need to bring in additional expertise, don’t delay. The tools are out there to ensure you begin the new year on the right foot.
