On 29 July 2020, the FCA published Guidance Consultation 20/3: Guidance for firms on the fair treatment of vulnerable customers (GC20/3). GC20/3 sets out feedback to the FCA’s initial guidance on its view of what the Principles for Businesses (the Principles) require of firms to treat vulnerable consumers fairly (GC19/3), and seeks views on updated guidance.
We set out a summary of the feedback received on the initial guidance, as well as an overview of the updated guidance at Annex 4 of GC20/3 (the Guidance). We also consider how firms can implement the Guidance in practice, and any areas of concern of which firms should be mindful.
Most respondents supported the FCA’s proposal to issue the Guidance, although there were concerns that the absence of rules setting minimum standards could result in firms taking inconsistent approaches. In addition, some respondents wanted greater clarity on how the regulator will monitor the impact of the Guidance and use it to hold firms to account.
Several respondents also requested further clarification clarity on whether the scope of the Guidance includes business customers and how the Guidance applies to firms within a complex distribution chain, including wholly digital distribution.
In response, the FCA confirms that it is not prescribing cross-sector minimum standards. This could result in the unintended consequences of “levelling down” in some sectors due to the differences in services offered, firm size and customer base. The regulator agrees with respondents that effective supervision is important and is planning communications and supervisory work around the finalised Guidance to ensure firms are aware of it and are taking action to ensure the fair treatment of vulnerable customers.
The FCA also confirms that the Guidance is intended to apply to the supply of products and services to retail consumers who are natural persons. ‘Natural persons’ includes individuals and also business customers, where businesses are not incorporated. Further, like the Principles, the Guidance applies to all firms in a distribution chain carrying out regulated activities regardless of whether they have a direct relationship with customer.
Finally, the initial Guidance distinguished between “actual” and “potential” vulnerability and, following concerns from respondents that this created an artificial distinction (as all customers are at risk of becoming vulnerable), the updated Guidance instead illustrates vulnerability as a spectrum of risk.
The updated Guidance begins by setting out the background to the FCA’s work in this area, providing an overview of the Principles underpinning the fair treatment of vulnerable customers, and setting out the six outcomes that firms should strive to achieve for all consumers.
A key FCA expectation is that firms ensure that their culture focuses staff, products, services and processes on the fair treatment of vulnerable customers and that the outcomes achieved for vulnerable customers “are at least as good as those of other consumers”.
To demonstrate that they have thoroughly embedded consideration of vulnerable customers into their culture, firms will need to show that:
Fundamental to the FCA’s Guidance is the expectation that firms take a proactive approach to understanding the nature and extent of vulnerability in their target market and customer base. Consumers with characteristics of vulnerability are more likely to have different or additional needs to other consumers, and firms’ failure to identify and address this may lead to poor outcomes for vulnerable customers. In particular, firms should:
Vulnerable consumers are more likely to experience harm when staff do not understand the importance of their own role in securing fair outcomes.
Firms should strive to embed the fair treatment of vulnerable consumers across the workforce. Senior leaders, in particular, should create and champion a firm culture that prioritises the fair treatment of vulnerable consumers and all relevant staff should understand how their role can impact vulnerable consumers.
In addition, frontline staff should have the skills and capabilities to recognise vulnerability and respond appropriately to individual consumer’s needs in order to treat them fairly. This means staff should be capable of exercising particular care to adapt to a consumer’s needs and should be able to recognise when it is appropriate to seek additional support.
Firms should also ensure frontline staff understand how to listen out for, and where necessary seek out, information that could indicate vulnerability. Any information captured should be properly recorded, to enable firms to meet their needs promptly, consistently and fairly.
Firms should turn their understanding of vulnerable consumers in their target market or customer base into practical action to meet their needs. Action should be embedded at key points of the product lifecycle and customer journey, including product and service design, customer service and communications.
When designing products or services, firms should consider the potential impacts of that product or service on vulnerable consumers. In particular, firms should consider the potential positive and negative impacts of a product or service on vulnerable consumers, and design products and services to avoid potential negative impacts. This includes assessing whether the features of a product or service is likely to exploit vulnerable customers, and considering how the characteristics of vulnerability present in firms’ target market or customer base may impact their customers’ needs over time.
Firms should also take vulnerable consumers into account at all stages of the product and service design process to ensure products and services meet their needs. This includes, amongst others:
Where products are sold through a broker or other intermediary, firms should ensure products are clearly explained and understood by the consumer. In addition, during initial and ongoing due diligence, firms should ensure that firms they work with treat vulnerable consumers fairly.
Finally, the Guidance also sets out how firms can ensure their customer service provision meets the needs of vulnerable consumers and how communications can be made accessible to vulnerable customers.
The Guidance is still in draft form and could be amended in light of responses the FCA receives to this latest consultation. However firms should note that, with the exception of the clarification as to scope and removal of a distinction between “actual” and “potential” vulnerability, the Guidance in its current form is substantially the same as its earlier draft. It seems unlikely, therefore, that any significant changes to the text will occur.
In addition, the Guidance itself is not intended to be read as new obligations. It is instead a statement of the FCA’s views on what the Principles for Business already require of firms, and so is a description of how firms should already be conducting their business. As ever with material the FCA labels as “guidance”, it will be prudent for firms in practice to treat the contents as obligatory
Firms should take action now, rather than waiting for the finalised Guidance, especially if they are likely to have significant gaps in their approach.
Firms should conduct a gap analysis to identify how their current practices compare with the behaviours set out in the Guidance. This analysis should be carried out across any aspect of the business where a firm interacts with consumers or makes decisions that will impact consumers, from product development to customer service. Any gaps identified should be rated according to the risk presented to vulnerable customers. Firms should then develop a plan to rectify those gaps, prioritising areas of high risk.
Firms should also begin assessing the target market or customer base of their products and services to identify any characteristics of vulnerability that need to be considered on a systemic basis. This may involve reviewing certain processes in light of the characteristics of vulnerability presented in their target market or customer base.
Finally, it is clear from the Guidance that a one-off review process is not going to meet the FCA’s expectations. Firms should implement an ongoing monitoring process and ensure systems and controls are put in place to assess continuously how the firm’s actions affect outcomes for vulnerable customers. This includes:
gathering regular and accurate management information which provides a continuous view on whether the fair treatment of vulnerable customers is embedded within the firm;
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