"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."
2023 saw a very challenging economic environment consolidating itself post-Brexit and post-pandemic. During the year we entered a new landscape in which interest rates increased and housing affordability became strained. Not only this but the cost-of-living crisis well and truly took effect. One of the biggest shifts of 2023 was undoubtedly the arrival of Consumer Duty.
No longer some vague piece of guidance, 2023 saw the Consumer Duty ensuring that identifying and meeting the needs of vulnerable clients would become a rule for every firm.
All in all, the Duty was met with an encouraging response from the industry. Work was 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 was much more to be done.
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.
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. But 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.
Regardless of the trials involved, identification must be a priority as we move through 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.
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.
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.
