Technology adoption is key to meeting Consumer Duty’s requirements

A lack of consistency happens far too easy with individual interpretations of vulnerability. Much like deciding if someone is ‘rich’ or ‘poor’, without some form of guidance, the answers vary based on a range of subjective viewpoints.

In their simplest form, the FCA’s new Consumer Duty regulations have been introduced to ensure financial services firms are delivering good outcomes for customers. In particular, the new Duty puts a clear emphasis on protecting those with vulnerability characteristics – people who are arguably the most susceptible to both potential harm and to poor outcomes.

This is certainly relevant in the field of specialist lending, which has offered a lifeline to many borrowers with niche requirements – or have a profile that is far from standard. 

For this reason, Consumer Duty may feel a little redundant for some – as, in their minds, they’ve long been treating customers fairly and have looked after vulnerable customers all their professional life. Indeed, current vulnerability guidance had already raised the need to assess and consider the vulnerability of consumers.

However, Consumer Duty significantly expands on this, adding the need to evidence that these vulnerabilities are assessed and monitored throughout the lifetime of the product. The scope of vulnerabilities has changed dramatically too, with firms now required to review all potential issues beyond just financial. This includes health and lifestyle challenges, divorce, domestic abuse, learning difficulties and many others. 

Finding vulnerability data

It is true that firms have considered the consumer’s situation and have taken into account any issues that came to light. However, despite the best intentions, most of this has been subjective, inconsistent and rarely documented. With Consumer Duty enforced from July, this process needs formalising – just as, in the past, how fact-finds moved from a subjective, informal approach to a formal, documented process. This simply isn’t possible though without robust vulnerability data. 

Many have searched for databases of ‘vulnerable people’ but, unfortunately, these just do not exist. It is true that socioeconomic data exists to identify cohorts of consumers – but this sits at a postcode level, not a personal one. And yes, there is credit data – which is personal – but it’s limited to financial vulnerability and affordability.

Instead of waiting for vulnerability databases, the reality is that consumers are themselves the only true source of data. The challenge is how to acquire that data. Many companies would have collected some data when consumers initially contacted them, whether it was for a complaint or a claim. Some larger tech firms may even use AI to interpret and assess voice and text interactions with consumers – this would certainly be beneficial for large lenders.

This seems like a fairly logical place to start, since the proportion of vulnerable people among this cohort is likely to be high. However, this is still just a subset of a firm’s customer base. Consumer Duty requires us to understand the vulnerability of all customers – not just those that get in contact. Since most identify vulnerabilities differently, there’s little consistency in who is registered as vulnerable or not.

Consistency is key

A lack of consistency happens far too easy with individual interpretations of vulnerability. Much like deciding if someone is ‘rich’ or ‘poor’, without some form of guidance, the answers vary based on a range of subjective viewpoints. When you also consider the vast number of characteristics and circumstances that can lead to vulnerability, the training required for staff to identify these becomes a massive undertaking, and a considerable expense. 

There’s also the consistency of data capture. While some firms may have added a vulnerability tick box to systems, the detail of the vulnerability is typically stored in an unstructured free-text format in a comment box. Such results are extremely difficult to report on – and impossible to analyse. Different standards of assessment and data capture leads to inconsistencies and reduces the value of any data produced. 

Directors of firms must demonstrate annually their implementation of Consumer Duty – with the FCA reinforcing the need to see evidence of this.  Good data is also essential for fair value and target market analysis. We can then understand if we are giving fair value to those with specific vulnerabilities and analyse how well we comply with the Equalities Act on the distribution of protected characteristics.

Utilising technology

A far more robust approach is to adopt an assessment tool which encompasses an objective and consistent way of measuring vulnerability. Such tools already exist, whether as a standalone system or integrated within CRM systems – helping to automate much of the process and minimise the administrative overhead.

For example, the MorganAsh Resilience System (MARS) generates a Resilience Rating which is much like a credit score, but for vulnerability. 

Brokers don’t need to remember the specific level of vulnerability which applies to the likes of domestic abuse, heart attack or divorce – because these are all embedded directly within the assessment tool. Furthermore, firms can use different options to gather information – either by a broker assessment or by the consumer completing an assessment online. There’s also the opportunity to configure tools to better align with different use cases and appetites to risk. 

Without an objective and consistent approach, many firms are reporting their proportion of vulnerable customers is in single figures. In contrast, firms using tools such as MARS are reporting closer to 50 percent, which is closely in line with the FCA’s own Financial Lives survey. Such a clear disparity shows that it’s impossible to ensure fair value or that products meet the needs of clients – key areas of focus for firms. 

Monitoring requirement

A consumer’s vulnerability will almost certainly change throughout the lifetime of a product – it would be rare for it not to – so there is a need to continue to monitor the consumer to ensure the product remains suitable. While the FCA doesn’t specify how often this should be done, many are considering that annual reviews on a proactive basis, as well as reviewing issues on a reactive basis, are sufficient.

Some have questioned whether the responsibility for this falls on the intermediary or on the manufacturer. As far as Consumer Duty is concerned, it doesn’t matter who undertakes the monitoring, just so long as it happens. Brokers may prefer to undertake this responsibility and plan in line with fixed-rate terms. One can assume the responsibility will fall to the party which wants to maintain the relationship for the long term. 

What is clear is that consistent and unbiased processes will play a critical role in not only meeting this requirement, but also in ensuring that all parties can understand and account for vulnerabilities both today and in the future. Since this is only possible through technology, it’s right that the FCA identifies adoption as a key focus for firms. 

Andrew Gething

Andrew is the founder and managing director of MorganAsh. Andrew, a recognised consumer vulnerability specialist and champion, is the driving force behind the award-winning consumer vulnerability management tool, MARS – adopted in the financial services, credit and utilities sectors.

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