A recent study and subsequent guidance consultation released in July 2019 by the Financial Conduct Authority (FCA) in the United Kingdom highlights the special needs and circumstances of vulnerable financial customers while suggesting guidelines on how to treat these clients. Many of these findings can be applied to the Canadian financial customer market.
It is imperative that financial planners and financial advisors understand what vulnerability is, what drives vulnerability and how to adjust client engagement processes to accommodate potentially vulnerable clients.
A vulnerable person is defined by the FCA as someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when the advice giver is not acting with appropriate levels of care. Vulnerability may be transient or short-term, or be a permanent or long-term state for certain financial consumers.
Some examples of when vulnerability occurs are when a financial consumer loses a partner, has a history of a stress-related illness or possesses a lower level of financial capability.
Broadly speaking, the following are the main drivers of actual or potential vulnerability, according to the FCA:
- health conditions or illnesses that affect the ability to carry out day-to-day tasks;
- major life events such as bereavement or relationship breakdown;
- a low resilience to financial or emotional shocks; and
- a low knowledge of financial matters or a lack of confidence in managing money.
The study showed that low financial resilience was the top driver of vulnerability.
The FCA found that some of the major impacts of vulnerability were:
- Financial exclusion. Vulnerable consumers are more likely to be unbanked and have no savings.
- Difficulty in accessing services. Older people may struggle to use digital communication channels. A disabled person may not be able to visit a physical branch.
- Partial exclusion. Vulnerable consumers may not be able to get the best deal because of their inability to search for it. They may also be declined a good deal because they represent a greater risk or because of discrimination.
- Disengagement with the market. Vulnerable consumers may hold a product for a greater period of time without switching because they find the process of switching overwhelming.
- Vulnerable consumers are more likely to fall victim to scams.
- Over-indebtedness. Vulnerable consumers are more likely to fall behind on key household bills or credit commitments.
- Exposure to mis-selling. Vulnerable consumers may be more likely to fall victim to buying products or services from providers who do not understand their circumstances.
- Inability to manage a product or service. Vulnerable consumers may be less likely to understand how to manage their use of a product or service.
Financial planners and advisors need to adjust their client engagement process to assess new clients and existing clients for signs of vulnerability. Although existing clients may not be vulnerable now, their personal circumstances may change, making them susceptible to vulnerability. Therefore, an ongoing monitoring of existing clients is very important.
Further, a client inquiry and discovery process should be developed and implemented around the four key drivers of vulnerability and their underlying causes. This is to ensure that your clients understand your solutions and, moreover, that your solutions are still appropriate for their personal circumstances.
The following is an example of a suggested discovery and compliance process to assess client vulnerability.
- Inquire about any physical disabilities.
- Inquire about any severe or long-term illness.
- Inquire about hearing or visual impairments.
- Inquire about state of mental health.
- Test mental or cognitive abilities.
- Inquire about care-taking responsibilities.
- Ensure that there are no bereavement issues.
- Inquire about ability to deal with an income shock.
- Identify if there is a relationship breakdown.
- Identify any non-standard requirements.
- Identify any over-indebtedness issues.
- Identify any low savings issues.
- Measure emotional resilience.
- Determine if a proper support structure exists.
- Determine knowledge and confidence in managing financial matters.
- Judge literacy or numeracy skills.
- Measure English language skills.
- Measure digital skills.
- Inquire about any learning impairments.
Vulnerability is a key issue when advising and helping clients — especially as your clients are growing older. Financial planners and advisors who take the time to understand and deal with vulnerability issues will ensure that they provide their clients with the utmost level of care.