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The impact of the cost of living crisis on financial vulnerability

Updated: Sep 22, 2023

When I am asked about the impact of the rising cost of living upon financial vulnerability it is tempting to simply say that everyone will be worse off; people won’t be able to afford essentials such as food, shelter and heat and, therefore, the levels of financial vulnerability will rise. However, as with many things in life, the reality is it is much more complex than that.

How many drivers?

If you are familiar with the guidance from the FCA around financial vulnerability, you will know they refer to the four drivers: health events, life events, capability and resilience. When thinking about the rising cost of living and its impact upon financial vulnerability, it is highly tempting to point to the ‘life event’ category and place it neatly in that box and forget about the other drivers. If we do so, however, we are likely to miss the true impact of the crisis and the resulting levels of vulnerability.

The truth is that the impact of the rise in the cost of living is going to be felt across a number of different areas of an individual’s life and the resulting level of vulnerability will depend upon how the individual responds to each of those areas.

There can be no doubt that whilst the obvious impact on the individual’s financial health needs to be considered, we must also consider the impact upon the individual’s physical health, emotional health and mental health.

The reality is that whilst this maybe a life event, its impact will also be largely defined by the individual’s personal levels of capability and resilience. If we extend the possible implications further, it is likely to result in a health event. So, in reality, what we are looking at is not one driver but all four.

Pieces of the puzzle

If we are then going to be looking at all four drivers, we need to understand how they work together. I wish I could give you a simple formula for this, but the fact is that the combination of these drivers will differ for each individual, but there is a process that we can follow to try and determine the what the final jigsaw will look like.

Start by identifying the trigger event – in this case, the rise in prices. Then determine the impact of this upon the individual’s current and projected future financial situation. Next, utilise your understanding of the person’s capability to start to determine the type of financial decisions they are likely to make. For example, can they apply their financial knowledge and experience to their current situation to come up with a plan?

Combine this with your understanding of their resilience – are they going to disengage or will they hunker down and start to come up with a strategy to implement any identified plan? How is their mental health affected? etc. Finally combine this with your understanding of any physical condition that they may have or that may arise as a result of the rise in the cost of living – are they going to be able to afford the necessary care or more basically, to heat and eat?

Once you combine all these factors, you should have a good indication of your client’s current level of financial vulnerability.

The start of the journey

It is tempting to see the understanding of the puzzle as outlined above as the end of the journey, but the reality is, it is just the start. We know from the FCA that once a client’s vulnerability is understood, they expect firms and advisers to then identify how to support their client’s so that they are not disadvantaged. By taking the information you have devised above, you can then really start to identify how to support your client to ensure they are not disadvantaged by your actions. For example, they are unable to engage via the channels you have chosen or understand the information as presented in the format you have chosen. This is often known as institutionalised vulnerability. It is worth remembering that your actions alone can create a circumstance that results in a vulnerability for your client, so it is always worth reviewing on a regular basis.


The fact of the matter is that none of us know how long the rise in the cost of living is going to last or the extent of detriment that it is going to cause to individuals or society as a whole. What we do know, however, is that everybody will be affected in some way but understanding the extent of the levels of vulnerability that it will actually cause is going to be far from straightforward.

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