With the curtains closed on 2023, Jonathan Barrett, CEO and Co-Founder of Comentis, the duty of care assessment company, looks back on the year’s key developments and offers some predictions for 2024.
2023 was quite the year, wasn’t it?
With a challenging economic environment consolidating itself post-Brexit and post-pandemic, we entered a new landscape in which interest rates were high and housing affordability became strained. The cost-of-living crisis took effect, and the industry needed to pivot in response, with firms acting on the duty of care they have for their vulnerable clients.
Given those extenuating factors, I would say that the biggest shift of 2023 was the arrival of Consumer Duty.
Vulnerability guidance has existed in financial services for several years, but aside from some large print for readers with failing eyesight or the occasional document translated into a client’s native language, it hasn’t historically been a priority. Now, the needle is moving. No longer some vague piece of guidance, Consumer Duty has made identifying and meeting the needs of vulnerable clients a rule for every firm. There’s no going back and it cannot be ignored.
We should acknowledge that this has meet been with an encouraging response from the industry. Work has been done by firms on pricing and fair value, with a strong focus on delivering vulnerability training and implementing new processes. But, as with any landmark piece of legislation, there’s more to be done.
Setting the standard across the industry is a process that will stretch well into this year and likely beyond. So what are the most pressing shortfalls, and what can we expect from the regulator in 2024?
Vulnerability data
As we move into the new year, the lack of vulnerability data being collected and reported is unquestionably one of the weakest links in the Consumer Duty chain. But with annual reports mandated for next summer, and the regulator consulting on its ongoing data requirements, we can very much expect to see this change in 2024. Reporting will need to be less anecdotal, and firms will have to start putting consistent processes in place as they build that data up. I’d like to think, as a result, that we’ll also start to see a shift in culture – that it won’t just be about what’s in a company’s guidelines, but about actually being able to deploy this data on a daily basis.
Identification
The identification of vulnerable customers is another pressing issue. Whereas we would expect a firm’s client vulnerability rate to be in the region of 23-24%, many of those we speak with at Comentis have a rate of around 3-4%. Vulnerable people are clearly being missed.
Let’s make no mistake – this isn’t a sign that firms are lazy or aren’t working hard enough. It’s simply a challenging process. Beside the fact that most financial advisers aren’t also trained clinicians, there are vulnerable people who want to stay under the radar or who have well-honed coping mechanisms. When it comes to the cognitive vulnerabilities – resilience and capability – some clients might not even know themselves that they’re vulnerable. Dealing with the clinical side of vulnerability is such a challenge that even the regulator struggles to discuss it.
But regardless of the trials involved, identification must be a priority in 2024. Right now, there’s quite a reactive approach, with a reliance on advisors just having a feeling that something’s wrong. This might work for a client who is quite clearly going through a divorce, bereavement or redundancy. But it means the hidden, clinical vulnerabilities are being missed. The FCA has said that self-identification – in other words, asking someone if they’re vulnerable – is not acceptable as a single means of assessment. This is encouraging, but there needs to be a viable alternative, and if an advisor is going to identify every vulnerability, new processes and pathways won’t be enough. Instead, there needs to be some form of specialist psychometric assessment.
Regulatory pressure
Not all firms are inherently equipped to deal with vulnerability in the same way. Some – namely those dealing appropriately with resilience and capability – are highly compliant with the new Consumer Duty measures. Others are earnestly trying but aren’t quite there yet. Then there are those that haven’t done anything at all.
The regulator recognises this, and while it works to determine exactly what “good” looks like in terms of Consumer Duty, will likely remain slightly sympathetic toward those trying to get it right. But once there’s a clear idea of what this final steady state should be, there will be hard scrutiny coming for firms that aren’t taking their duty of care seriously.
Given the scope of Consumer Duty, it could take all of 2024 to reach that point, with the scrutiny coming in 2025. But with the cost-of-living crisis likely to yield a significant increase in vulnerability-related complaints next year, and the subject of our ageing population raising more and more concerns about mental capacity, we can be certain there is greater regulatory pressure on the way.
Looking ahead
We often talk at Comentis about the arrival of Consumer Duty being the start of a race, rather than the finish-line. But while some good progress was made in 2023, and there were undoubtedly good intentions, that start has been slow. Addressing the issues surrounding identification and vulnerability data remains critical, and with tough scrutiny on the horizon, it’s far better to get on the front foot now than to fall behind.
To make the progress required in 2024, firms must consider a specialist digital assessment, whereby subjectivity is removed, consistency is ensured and all vulnerability drivers are 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. Perhaps most importantly, however, they remove the need – and indeed the pressure – for advisers to correctly identify vulnerability with only their own gut feeling.
We’ve made good strides, but there’s still a long way to go. The race has only just begun, and we can’t stand still. We need to get moving.
