FCA Consumer Duty requires UK advisors to provide additional support to ‘vulnerable customers' from July
The FCA’s definition of 'vulnerable customer' is 'someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care'. According to the FCA's Financial Lives Survey in 2020, about 46 per cent of UK adults (equivalent to 24 million people) showed one or more characteristics of vulnerability. Advisors thus need to be especially alert to signs of vulnerability in their clients to minimise their own professional risk, especially the need to ensure their client has the capacity to give instructions. Law firm Farrer & Co notes that the test for vulnerability is much broader than the legal test for capacity set out in the Mental Capacity Act 2005.
According to the FCA, key markers of vulnerability include health conditions or illnesses, whether mental or physical; significant life events including bereavement, relationship breakdown or new caring responsibilities; poor resilience and poor literacy, numeracy or digital skills.
Where advisors have a long-term relationship with a client they should also look for general patterns that might indicate a client is moving towards a vulnerable position. These could include a dramatic departure from previously stated and often long-standing intentions, particularly when new instructions come about abruptly and without explanation. Another warning sign is making decisions that would lead to a negative outcome, either due to health issues impairing their cognitive function or due to undue influence from third parties. Instructions being given through a third party are also a red flag, particularly if the client is not copied into emails or if the third party is resistant to allowing the client to attend calls or meetings with the advisors directly. Rambling or incoherent instructions, or unusually heightened or erratic emotions, are a further alert for action.
Farrer comments that responsibility for identifying and protecting vulnerable individuals is shifting in two key ways. First, the duty to be alert to risk drivers and to identify vulnerabilities lies now with a broader range of practitioners and the expectations on financial advisors and how they treat vulnerable clients has significantly increased over recent years, it notes.
Second, the range of situations in which a client is seen as vulnerable is considerably wider than in the past. Advisors can no longer rely solely on the legal test for capacity and instead must be aware of the range of vulnerabilities to which a client may be subject.
The FCA itself offers similar advice in its new guidance. 'Our rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey', it says.
The new FCA policy is being introduced on a phased basis. The rules come into force on 31 July 2023 for new and existing products or services that are open to sale or renewal. For closed products or services the rules come into force on 31 July 2024.
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