"There is a significant difference between understanding vulnerable customers and identifying vulnerable customers. But firms really need to understand both."
The Chartered Insurance Institute (CII) recently published a White Paper that seeks to support firms’ compliance with the Financial Conduct Authority’s reporting requirements under the Consumer Duty. Within the paper, the CII states that “many survey respondents would benefit from assistance to better understand the characteristics of vulnerability and identify vulnerable customers”.
And we couldn’t agree more.
One of the many recommendations that the CII makes to firms focuses on how those firms can identify whether they have a robust understanding of vulnerability for their customer base. This process should be one that “enables them to develop informed vulnerable customer strategies that will lead to good outcomes for all customers, including those with characteristics of vulnerability”.
What’s clear from this paper is that there remains a very real issue here regarding a lack of understanding that firms have around vulnerability identification. And this supports our belief that vulnerability identification is still by far the weakest link in the vulnerability puzzle.
No matter what a firm does around vulnerability – whether they put in place vulnerability training for employees, improve policies or dedicate more procedures to help their vulnerable clients – all of this is arguably worthless without the right identification process in place at the outset.
So, what’s going on here? Why is this issue happening and how can firms get better at this upfront vulnerability identification?
I think there are a few issues at hand here. Often, we’re seeing that advisers themselves are being relied upon to spot the signs of vulnerability in their clients. But the simple truth is that financial advisers are not trained mental health professionals and they never will be. They are experts at what they do of course, but we should never expect them to possess the clinical expertise to recognise the subtle and nuanced signs of vulnerability. After all, vulnerability is far from a fixed boundary that certain groups of people fall into. Rather it’s a delicate threshold that shifts throughout our lives. This means that anyone (no matter what their wealth, age, gender, or status might be right now) can step over that line in an instant. As such, relying on the adviser to spot the signs personally is unquestionably impractical.
In addition to this, firms sometimes believe that clients themselves might share their vulnerabilities. But this is at best wishful thinking, and at worst dangerously naïve. After all, it’s entirely possible that the client themselves might not even be aware they’re at risk from a vulnerability. Just as a financial adviser may lack the clinical expertise to connect a change in social circumstances with financial vulnerability, so too will the average client. We should also consider the possibility that those who are aware that they are vulnerable may not want it to be known. There’s still a very real stigma surrounding the prospect of being vulnerable, and a sense of shame that causes people to shy away from discussing it. This means that relying on clients to be open about a potential vulnerability will never work as a means to identify vulnerability.
As with many complex challenges like this, data is, and always will be, the answer.
Interestingly, the CII paper documents that 21% of firms still have a ‘data gap’ when it comes to understanding vulnerability and that 26% of firms are merely using data right now as a ‘stop gap’ – rather than it being fit for purpose long term. As the CII paper suggests, there is a significant difference between understanding vulnerable customers and identifying vulnerable customers. But firms really need to understand both. And more than that – if they don’t get identification right, they can’t really begin to understand those vulnerable customers anyway, as the two concepts are intrinsically connected.
The best way to achieve identification is through data. A systematic process for screening all clients, with appropriate accommodations for the needs of those at risk is key. By combining clinical expertise with hard data, through a digital assessment, advisers can remove bias and subjectivity from the process, ensure consistency across their whole client base and be reassured that their systems will adequately meet the scrutiny of regulatory requirements.
To reiterate, identification is by far the most important part of supporting a vulnerable client – without it the rest of the process is, quite frankly, worthless. I would urge firms to work on getting identification right up-front, by putting tools in place that systematically checks every client for signs they may be at risk. If they can get this bit sorted at the start, the rest will flow from there, plus the investment that’s being put into training and policies will be money well spent long-term.
