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As we continue into 2024, we can draw on our insights gained from last year and summarise what we feel might come next from a regulatory point of view.
Without a doubt, the introduction of Consumer Duty at the end of July 2023 was the biggest shift for all regulated firms in terms of vulnerability identification. Whilst vulnerability guidance has existed in financial services for several years, aside from some large print for readers with failing eyesight or the occasional document translated into a client’s native language, it hasn’t historically been a priority.
Consumer Duty has now made identifying and meeting the needs of vulnerable clients a rule for all regulated firms and whilst some great strides have been made, as with any landmark piece of legislation, there’s more to be done. Setting the standard across the industry is a process that will stretch well into next year and beyond. So, what are the most pressing shortfalls, and what can we expect from the regulator in 2024?
1. Data
The lack of vulnerability data being collected and reported is unquestionably one of the weakest links in the Consumer Duty chain. But with the FCA mandating annual reports from this summer and is consulting on its ongoing data requirements, we can expect to see this change in 2024.
Reporting will need to be more robust, and firms will have to start putting consistent processes in place as they build that data up. Alongside this, we’re likely to start seeing a shift in culture, so rather than it being theoretical policy, it will become more about actually being able to deploy this data on a daily basis.
2. Identification
The identification of vulnerable customers is another pressing issue. Whereas we would expect a firm’s client vulnerability rate to be in the region of 23-24%, many of those we speak with have a rate of around 3-4%. Vulnerable people are clearly being missed.
It’s easy to reason why: it’s simply a challenging process. Most financial advisers obviously aren’t trained clinicians, and there are vulnerable people with well-honed coping mechanisms who want to stay under the radar. When it comes to the cognitive vulnerabilities – resilience and capability – some clients might not even know themselves that they’re vulnerable.
Despite this, identification will be a priority in 2024. To date, there’s been quite a reactive approach, with a reliance on advisors using their intuition to determine if a client may be vulnerable. This might work for a client who is quite clearly going through a divorce, bereavement or redundancy. But it means the hidden, clinical vulnerabilities are being missed. The FCA has said that self-identification – in other words, asking someone if they’re vulnerable – is not acceptable as a single means of assessment. This is encouraging, but there needs to be a viable alternative, and if an advisor is going to identify every vulnerability, new processes and pathways won’t be enough. Instead, there needs to be some form of specialist assessment.
3. Regulatory pressure
Not all firms are equipped to deal with vulnerability in the same way. Some – namely those dealing appropriately with resilience and capability – are highly compliant with the new Consumer Duty measures. Some have put in place certain measures but aren’t quite there yet and there are those that haven’t yet done anything at all.
The FCA is aware of this and will likely remain slightly sympathetic toward those trying to get it right. But once there’s a clear direction on what this final picture will be, we fully expect that there will be hard scrutiny coming for firms that aren’t taking their duty of care seriously.
It might not be until the end of 2024 that we get to that point, with potential sanctions coming in 2025. But with the cost-of-living crisis likely to yield a significant increase in vulnerability-related complaints this year, and the subject of our ageing population raising more and more concerns about mental capacity, we can be certain there is greater regulatory pressure on the way.
What next?
We’ve used a metaphor before that the arrival of Consumer Duty is being like the start of a race, rather than the finish-line. While some good progress has been made in 2023, and there are undoubtedly good intentions, bigger strides will need to be taken in 2024.
Addressing the issues surrounding identification and vulnerability data remains critical, and with tough scrutiny on the horizon, it’s far better to get on the front foot now.