The finalised guidance on redress from the FCA marks a clear step forward in how firms are expected to identify, assess and remedy consumer harm. The guidance focuses on the design and delivery of redress schemes where firms ‘may’ have caused foreseeable harm. More than this, it is yet another reminder from the regulator that firms need to understand their customers – particularly those in vulnerable circumstances.
The guidance requires firms to take a structured and evidence-based approach when investigating and rectifying potential issues. This includes proactively identifying harms, quantifying the number of customers affected and understanding the scale and complexity of the issues. Crucially, firms also need to assess whether vulnerable customers have been affected and, if so, have whether they experienced harm differently.
This is undoubtedly where firms looking to remediate are likely to face challenges.
To be able to quantify harm effectively, firms need to clearly understand their customer base – including the characteristics and circumstances that may make certain individuals more susceptible to harm and how they overcome this daily. Without knowing this information, it can be really hard to determine the scale or complexity of an issue, or whether it’s impact has been disproportionate.
According to the FCA’s Financial Lives survey, around half of UK adults are vulnerable in some way, meaning that in any redress scenario, there is a strong chance that a significant proportion of those affected will fall into this category. As we know, vulnerability is far from binary or uniform. It comes in many forms, whether it’s health and life events, financial vulnerability or the person’s ability to engage. With severity, impact and coping mechanisms varying massively too, firms need a far deeper understanding of the vulnerability within their customer base.
This becomes even more critical when firms need to move from operation to investigation and remediation.
Where redress exercises are required, the FCA is clear that firms must ensure outcomes meet the needs of all customers impacted, including those in vulnerable circumstances. In practice, this means knowing who our vulnerable customers are, why they are vulnerable and how that vulnerability could impact their ability to engage with the process.
A key challenge is that many firms across financial services still only identify vulnerable customers in single-figure percentages. It is a significant issue and a big reason why we developed a vulnerability calculator – to give firms a better idea of the likely scale of vulnerability based on their number of customers.
More often than not, the reason is because firms are relying too heavily on reactive measures – such as waiting on customers to disclose their vulnerabilities, or capturing information only when an issue is visible or becomes apparent. The FCA’s recent intervention on consumer understanding highlights this as a real weakness across the industry, noting that too many firms lacked the proactive measures to identify and manage customer vulnerability – as required under Consumer Duty.
A lack of sufficient vulnerability data creates a clear operational and regulatory risk – particularly at the point of redress. Without it, firms risk running a remediation programme which is completely out of touch with the needs of their customers and fails to rectify the issue. Firms may even be forced in the midst of redress to retrospectively identify and assess vulnerability, which is not only complex and resource-heavy, but is likely to delay a resolution.
Contrast this with a proactive approach – built around objective and consistent assessment and robust IT systems, processes and data infrastructure – and firms are far better positioned to respond quickly and effectively when issues arise.
Embedding good customer vulnerability management means that firms better understand their customers, anticipate potential risks and have the information they need to personalise their products and services. This ensures that everything from everyday interactions, right through to exceptional processes – like a redress exercise – are designed with the customer in mind.
For those firms that have not yet got to grips with proactive customer vulnerability, the CII and the PFS has created some fantastic guidance on this. Rather than regurgitating the regulation, it provides a coherent action plan and sets out what good look likes when it comes to IT systems, classification and data infrastructure. The overriding message in this guidance is that technology holds the key to not just identify and classify, but to monitor, support and report on customer vulnerabilities and outcomes in an efficient and cost-effective way.
Solid foundations ensure that we do more than just react when things go wrong. Instead, we can demonstrate we know our customers well enough to prevent harm where possible and respond effectively if or when it does occur.
