By Josephine Tan
for the 2024 Risky Women Writing Competition, presented in partnership with Bovill Newgate
Is it important to support vulnerable customers in the financial services industry amid rising economic uncertainties? This article discusses regulatory changes in Australia and the UK, the costs of inadequate support, and the need for firms to adopt proactive measures. By embedding care for vulnerable customers into their practices, organizations can enhance customer experiences and ensure better outcomes for all.
In today’s socio-economic climate, consumers find themselves facing increased financial uncertainty and vulnerability. Rising living costs, economic fluctuations, and the aftermath of global events such as the COVID-19 pandemic, have exacerbated the challenges for those already in vulnerable circumstances. This article explores the value of caring for customers in vulnerable circumstances within the financial services industry, by examining the current regulatory landscape in Australia and the UK, the costs of lack of care, and why firms should be more proactive.
Understanding vulnerability…
A ‘vulnerable customer’ can be defined as ‘someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care’ (Financial Conduct Authority, 2021). Various indicators can help you identify if someone is in vulnerable circumstances, including personal, situational, and structural indicators. When speaking about vulnerable customers, it is important to recognise that vulnerability is transient, meaning anyone can experience it at any stage of their lives. Further, just because an indicator is present, an individual may not consider themselves vulnerable. Vulnerability can impact and appear differently for everyone.
What’s happening around us…
We have seen shifting regulator and government intentions on how financial firms support customers in vulnerable circumstances.
In Australia, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) between 2017 and 2019, highlighted the lack appropriate products and support services for vulnerable customers. Significant regulatory reforms followed, including updates to Industry Codes, the introduction of the Design and Distribution Obligations and an enforceable Internal Dispute Resolution regulatory guideline. These reforms established clearer expectations around the adequate identification and treatment of vulnerable customers, and in the design of products and services to make them more accessible, inclusive, and appropriate.
During and after the COVID-pandemic, expectations on firms evolved while many consumers felt the negative impacts of a slowing economy and rising costs. And fast forward to now, the Australian Securities and Investments Commission (ASIC) remains steadfast with its enforcement priority to address misconduct which involve a high-risk of significant consumer harm, particularly conduct targeting financially vulnerable customers. This year, ASIC released a report with findings and practical recommendations from its review of ten large home lenders and their approach to hardship support. Of note, was ASIC’s finding on inadequate support for vulnerable customers, beyond their financial hardship. The Australian government is also in the midst of a Parliamentary Inquiry into the Financial Services Regulatory Framework in Relation to Financial Abuse to evaluate the effectiveness of existing laws governing the ability of firms to prevent and respond to financial abuse.
In the UK, the Financial Conduct Authority (FCA) is paving the way on leading practices for the fair treatment of vulnerable customers. The FCA expects firms to embed consideration of vulnerable customers across the customer and operational lifecycle, including product, communications and data. There is also a call out for robust outcomes monitoring to ensure outcomes received by vulnerable customers are as good as those for other customers.
Interestingly, the FCA introduced the Consumer Duty, amongst other regulatory interventions, following a review of lenders on ‘Borrowers in Financial Difficulty’ in 2021. This is similar to the review ASIC undertook this year. However, the Consumer Duty obligations have moved from expecting firms to avoid poor customer outcomes, to actively delivering positive customer outcomes.
We are seeing parallels in the swing of the pendulum from key consumer protection regulators, indicating a move towards stronger protections for vulnerable customers.
What’s the cost…
We know, based on experience, there are negative impacts and costs associated with not having appropriate measures in place to support vulnerable customers. Recently, more information has become available to help us quantify these costs. Having appropriate measures in place is, arguably, less costly than not.
From a business perspective, we have seen a firm in the UK receiving regulatory penalties of £6.2 million for unfair treatment of customers in financial hardship, in addition to incurring costs of £94 million in identifying and rectifying issues, as well as £185 million in customer remediation (FCA, 2024).
More importantly, from a consumer perspective, a major bank commissioned a review into the cost of financial abuse in Australia, which showed the impacts of financial abuse was estimated to have generated $5.7 billion in direct costs to victims in 2020. The review also noted a $5.2 billion costs to the broader economy in the same year (CBA and DAE, 2022).
We can be more proactive…
There is growing momentum in this space, and it is encouraging to see firms reorienting their focus on customers with renewed commitment. Firms are also considering how to create ‘remarkable customer experiences’, embodying a ‘customer obsession’ culture, and increasingly promoting a message of ‘we are here to help’.
However, without scrutinising and sustainably investing in how effectively their vulnerable customer framework operates, firms may not truly achieve these customer objectives. Firms are expected to mature their practices beyond minimum compliance by being more proactive on understanding customers’ needs, recognising and responding to customers, designing product and services to embed vulnerability considerations and avoid potential harm, delivering customer service which meets the needs of customers in a flexible manner, providing accessible and consistent support, and monitoring and evaluating outcomes.
Moving forward…
Firms are increasingly grappling with operational challenges, such as ensuring operational resilience, incorporating environmental, social and governance principles, and managing risks posed technological advancements. When revisiting their business plans, firms should also be reminded that the currency of care is immeasurable. It must be an integral part of any firm’s customer value proposition, business strategy, and operations, demanding commitment across Board and Management, with adequate oversight and challenge from Risk and Compliance functions.
Your customer today, may not be vulnerable circumstances. However, if they are now, and happen to be in the future, it is what you do in moments that matter for your customers which defines your commitment to being customer centric. Creating value for your customers, will create value for your business, and consumers at large can expect to experience improved outcomes.
References
- Commonwealth Bank of Australia and Deloitte Access Economics (2022), The Cost of Financial Abuse in Australia, accessed 16 September 2024
- Parliament of Australia (2024), Parliamentary Joint Committee on Corporations and Financial Services – Financial Services Regulatory Framework in Relation to Financial Abuse, accessed 16 September 2024
- Royal Commissions (2019), Misconduct in the Banking, Superannuation and Financial Services Industry, accessed 16 September 2024
- The Financial Conduct Authority (2021), FG21/1 Guidance for firms on the fair treatment of vulnerable customers, accessed 16 September 2024
- The Financial Conduct Authority (2024), FCA fines HSBC over treatment of customers in financial difficulty, accessed 16 September 2024