Consumers’ access to financial services Contents

6Defining vulnerability

171.The Financial Conduct Authority (FCA), the UK’s financial services conduct regulator, has an agreed definition of who constitutes a vulnerable consumer, stating that they are:

Someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.156

172.This definition of vulnerability is quite broad, and the Committee therefore took evidence on whether such a definition is workable in practice. When giving oral evidence to the Committee, Christopher Woolard, Executive Director of Strategy and Competition at the FCA, explained why a broad definition of vulnerability was needed:

It requires people to start from a broad definition because, if you take it at its broadest, up to 50 per cent of customers could be potentially vulnerable at any one time. The actual detriment that we will see will be far smaller than that number, but we think it is workable, in the sense that, if we look at how vulnerability expresses itself in financial services, it is far wider than the protected characteristics. For example, people who have suffered a recent bereavement are particularly vulnerable. Individuals who have a low level of financial literacy will be particularly vulnerable, just by the nature of their circumstances. We have to find a way to capture that and get people to think about and engage with those circumstances, but we believe that is the right starting point.157

173.The Committee received a range of views from charities and trade associations who broadly welcomed the FCA’s work on defining vulnerability, but also raised concerns about how the definition is applied across industries. In oral evidence to the Committee, Matthew Upton, Head of Policy for Consumer and Public Services at Citizens Advice said that:

This is a really difficult area, because I understand in many ways the bind that firms feel they are in. There is almost this ping pong back and forward between very static definitions of vulnerability that give everyone clarity—you know as a firm who the vulnerable groups are, and if you look after them you are fine—and the incredibly dynamic definitions where people fluctuate in and out. The dynamic definitions are very good. We get into unhelpful territory when, rightly, people say that everyone can be vulnerable in different circumstances.158

174.The Financial Inclusion Commission, an independent body that campaigns on financial inclusion, called for a ‘whole systems’ approach to defining vulnerability:

Consumers’ needs cannot be segmented artificially in order to fit how regulators and government divide their respective responsibilities. The issue of consumer vulnerability, as reflected by the FCA’s definition, highlights how consumers’ personal circumstances influence their financial behaviour. Money and financial products and services do not sit in isolation away from the rest of [ consumers’] lives. This calls for a ‘whole systems’ approach where regulators and government work together, in the latter case across departments.159

175.In written evidence to the Committee, the Building Societies Association commented that the new vulnerability guidance from the FCA means that financial services providers need to make value judgements:

We are concerned that this new approach moves away from focusing on consumers’ needs as individuals towards a broader consumer protection-based agenda. An example of this is the call by mental health charities that there should be more intervention where individuals make unwise spending decisions while affected by their mental health condition. This pushes firms to make value judgements as to what is “unwise” against the principles of the Mental Capacity Act. It is also unhelpful that the FCA’s categorisation does not cover vulnerability to crime, although regulators, such as the Payment Systems Regulator, are focusing on this.160

176.The Financial Services Consumer Panel, an independent statutory body, set up to represent the interests of consumers in the development of policy for the regulation of financial services, presented a different possible approach to defining vulnerable consumers:

A better starting point would be the European Commission definition of vulnerable consumer, which explicitly acknowledges the market environment—and in particular firm behaviour—as a source of vulnerability, alongside personal characteristics and situations. This is a better way of identifying and addressing vulnerability to harm while at the same time preventing firms focusing on some groups of consumers to the detriment of others who are not badged as ‘vulnerable’.161

177.In addition to the FCA’s broad definition of a vulnerable customer, Nisha Arora, Director of Consumer and Retail Policy at the FCA, assured the Committee the FCA also operates a series of indicators that could signpost potential vulnerability:

We have set out various indicators of potential vulnerability, and they are broad. They go from health through to life events, such as bereavements, through to low financial capability and low resilience. We think that is the right approach. We do not want to take a narrow approach, because vulnerabilities take all sorts of forms and that is recognised by industry.162

178.In order to help firms meet the FCA’s expectations, and their own obligations to treat vulnerable customers fairly, the FCA has consulted on its definition and indicators of vulnerability, and will be producing guidance this Spring.163 This guidance will include “the customer journey from identification, through to fair treatment, through to redress and recourse in the treatment of consumers, […] guidance on training and how firms need to embed the right culture in their organisations.”164

179.UK Finance, a trade body for UK financial services, submitted evidence to the Committee stating that the industry required clarification from the FCA:

The industry has previously asked the FCA to provide greater clarity of its expectations of firms with respect to customers in vulnerable circumstances. We therefore support the FCA’s intention to do so through a more balanced definition of ‘vulnerability,’ per its forthcoming vulnerability consultation and guidance, for intervention and enforcement purposes.165

180.The Committee received specific examples of ways in which guidance issued by the FCA could be clearer or more prescriptive. The Association of Mortgage Intermediaries wrote:

Over recent years the FCA has become more reluctant to issue guidance for fear of judicial review, which is unhelpful for firms. Instead of introducing a general and non-specific duty of care, firms would benefit from further guidance. For example we have asked for guidance on the Insurance Distribution Directive (IDD) as the FCA could have done more to engage with firms to help them understand the requirements. […] As a trade body we communicated with our firms, which should have been the responsibility of the regulator.166

Responsible Finance submitted evidence stating:

The Financial Conduct Authority needs to provide more guidance on what they deem an appropriate way to deal with loan applications by customers who have been identified as vulnerable. It is a highly subjective area and the regulatory boundaries are unclear at present. For example, vulnerability can become a risk issue: should you lend to someone who has disclosed that they have terminal cancer?167

181.The Committee broadly welcomes the FCA’s work to define vulnerability and recognises that the FCA’s broad definition of vulnerability allows it to include not just those individuals who may be permanently vulnerable, but also those who are vulnerable due to their temporary circumstances.

182.The FCA must set clear expectations of how financial service providers should treat vulnerable consumers under its definition, through the guidance it plans to publish across all sectors that it regulates.

Disclosing vulnerabilities

183.The Committee considered the issue of consumers having to disclose their vulnerabilities to financial services providers in order to receive appropriate treatment. In its written submission to the inquiry, UK Finance stated that:

While the industry recognises it has a role in identifying the signs of vulnerability, there is also a need to encourage greater disclosure from consumers in order to secure appropriate support.168

184.However, a number of organisations were opposed to increasing the emphasis on consumer disclosure, stating that placing the emphasis on consumers increased the potential for consumer detriment. The Money and Mental Health Policy Institute explained that:

[Many people] do not feel comfortable telling firms about their mental health. Support services reliant on disclosure, or which require someone to make a telephone call, are inaccessible to many consumers with mental health problems. Money and Mental Health favours a universal design approach to these accessibility problems. By ensuring that communications are accessible, even to those with particular problems understanding, regulators can reduce harm for those with mental health problems and benefit consumers more broadly with simpler information.169

185.In its written submission, The National Aids Trust agreed with the Money and Mental Health Policy Institute, writing:

Any strategy to identify vulnerability which relies on disclosure will undoubtedly miss a significant proportion of people living with HIV and could put vulnerable consumers at risk of harm. The [universal design] approach involves considering the additional needs of those who may be vulnerable, and working to make services as broadly accessible as possible—with the additional benefits of making services simpler and easier to access for those who are not currently in vulnerable circumstances.

However, it is also important that guidance focuses on how financial services providers should respond when a consumer does share information about their medical condition. This is particularly important for conditions that are stigmatised, such as HIV and mental health problems. Service providers should be adequately trained to respond sensitively to disclosures of pre-existing conditions, and understand what support is available to these customers.170

186.As discussed earlier in this report in chapter three in relation to access to insurance, the Committee also received evidence that consumers may not wish to disclose conditions due to subsequent unfavourable pricing.

187.Nisha Arora, Director of Consumer and Retail Policy, FCA, told the Committee that, while a lack of disclosure created difficulties for firms, they still had more work to do in identifying vulnerable customers where such customers may understandably be unwilling to disclose their particular circumstances:

Sometimes consumers will disclose, but we know from our research that there are a number of reasons why they do not want to disclose. […] I would not expect a firm to be able to identify every consumer, particularly those who do not disclose, but we think they should have the policies and practices in place that can enable identification. They need to make an effort to identify their customers and really understand customer needs, in particular the needs of vulnerable consumers. There are a number of ways they can do that. We have seen really good examples of frontline training, where people are actively listening and are trained, as our contact centre is, to look out for the triggers of vulnerability. It is slow, but we are seeing firms starting to use data and analytics to identify patterns and trends that can identify potential vulnerabilities, where people might be spending slightly differently.171

188.There are many reasons why consumers may not wish to disclose their particular circumstances to their financial services providers. This lack of disclosure may cause providers difficulties in identifying which of their customers require additional support. Nonetheless, it is beholden on firms to know their customers and create a culture from top to bottom where consumers feel comfortable discussing what their specific needs might be, in the knowledge that those needs will be met. Firms should design their interactions with customers to enable them to identify their customers’ vulnerabilities, and they must not use a customer’s lack of disclosure as an excuse not to provide the support required.

189.If firms designed their products to be accessible to all customers using a universal design approach, many of the issues faced by vulnerable consumers—including their concerns over having to disclose their vulnerability—would be removed.

190.The FCA guidance, when published, should provide firms with clear examples and principles of how they should go about identifying customer vulnerabilities.

Training staff to understand consumer vulnerability

191.The Committee took evidence on whether financial services providers were providing their staff with sufficient training to enable them to provide support to the wide range of consumers who could be considered vulnerable.

192.Macmillan Cancer Support, in written evidence to the Committee stated that:

We believe that current industry practice must improve and should go beyond frontline staff training programmes.172

At a Committee outreach event in Newcastle, the Committee heard that even where additional support was available, often customer service staff were not aware of the services, or trained correctly to make use of them. If customers make the journey to a branch and the relevant support is not provided—even if it should have been available because the staff are unaware—it can cause significant problems for the customers involved.173

193.However, the Money Advice Trust noted that some improvements in how financial services providers were approaching training their staff in all aspects of vulnerability (were being made):

We have seen evidence of improvement directly. Since 2015 there has been a significant increase in demand for the Money Advice Trust’s vulnerability training for frontline creditor staff, which has now helped nearly 19,000 staff in 219 creditor organisations to better identify and support customers in vulnerable circumstances.

While historically firms had tended to largely focus their staff training around mental health problems, this training has evolved to increasingly cover the wider range of other vulnerable circumstances that customers experience—such as serious illness, addiction, mental capacity limitations and bereavement.174

194.Nisha Arora told the Committee that the FCA has been looking at how firms provide staff training and how they support staff, and have concluded there is some good practice but it is not consistent.175 The FCA will include training in its upcoming guidance and will recommend “that there is a consistent policy and line of sight right from the board through to the frontline staff, so they have the support and the networks they need.”176

195.At present, training provided to staff is not uniform across financial services providers. Firms have a responsibility to ensure that all customer facing staff are adequately trained in how to assist vulnerable customers.

196.The Committee recommends that, within its vulnerable customer guidance, the FCA must outline the level of training that all frontline financial services staff are required to take. This training should be set at a high standard, and instruct staff in how to be empathetic and understanding when supporting vulnerable customers. In addition, staff must be aware of all of the disability adjustments and services that are available to their customers without fail.

Duty of care

197.In July 2018, the FCA consulted on a proposal for financial services providers to have a ‘duty of care’. There were two versions of the duty of care which were proposed. In the consultation paper the FCA stated that:

In calling for a new duty, some stakeholders have suggested that it should be a ‘fiduciary duty’ and some have suggested it should be a ‘duty of care’. Sometimes the proposed new duty has been expressed in a way that incorporates concepts from the legal definitions of both ‘duty of care’ and ‘fiduciary duty’. The legal definition of a ‘duty of care’ is an obligation to exercise reasonable care and skill when providing a product or service. A ‘fiduciary duty’ is complex to define but means, broadly, that firms must not put personal interests above those of the client, must avoid conflicts of interest and must not profit from the firm’s position without the client’s knowledge and consent.177

198.In its written evidence to the Committee the FCA outlined the current level of service that financial services providers were expected to provide:

Firms do not have an obligation to provide services to consumers unless the law creates specific universal obligations—such as the obligation on certain financial services firms to provide access to basic banking services.178

199.Much of the evidence received for the inquiry was supportive of a duty of care. Sian Williams, Director of the Financial Health Exchange at Toynbee Hall, a charity focused on issues relating to poverty, and a member of the Access to Cash Review Panel, told the Committee in oral evidence that:

I absolutely agree that there should be a duty of care. At the moment, legislation and regulation only require that firms put the best interests of their customers first in certain circumstances. This means that there are many other circumstances where they do not have to put the best interests of their customers first. That goes to the heart of the problem.179

Similarly, the Money Advice Service written submission stated:

A duty of care could strike a better balance between firm and consumer responsibilities and help deliver extra protection and better treatment to vulnerable consumers. In line with the stated aim of the FCA’s Mission to focus on prevention rather than cure, a “duty of care”—with a positive obligation to promote customers’ best interests—could encourage firms to identify potential customer harm and avoid it.

A new duty that gives financial services firms a positive obligation to promote customers’ best interests; and a fiduciary duty not to cause harm to a customer’s financial interests could enable consumers to take legal action to obtain redress for a breach of duty of care. Consumers are currently unable to take legal action solely as a result of a breach of an FCA principle such as treating consumers fairly.180

200.Baroness Tyler of Enfield, Chair of the former House of Lords Committee on Financial Exclusion, told the Committee:

Other professions, such as the legal and medical professions, have a duty of care. It would make a real difference.181

201.The Financial Service Consumer Panel submitted evidence to the inquiry that suggested a minimum response that the FCA could introduce, were a duty of care rejected:

Some types of firms, for example financial advisers, are already required to act in their clients’ best interests, which is stronger and clearer than the FCA’s ‘Treating Customers Fairly (TCF)’ Principle for Businesses. The FCA should, as a minimum, amend its Principles for Businesses, to require all firms to act in customers’ best interests and manage conflicts of interest fairly and so as to avoid consumer harm. This should be backed with a right for an individual to take court action against a breach. However, the best outcome for consumers would be to enshrine a duty of care in the Financial Services and Markets Act (FSMA).182

202.However, written evidence from UK Finance cautioned against a duty of care as it would raise a number of issues:

The introduction of a duty would add a further layer of complexity and regulatory obligation that would impose further costs on firms and their customers and potentially affect product cost and availability. This is illustrated by potential unintended consequences that could arise in those areas of business that involve a third party, for example mortgages (lawyers, brokers, non-borrowing occupiers, tenants) and savings (attorneys, parents on children’s accounts, personal representatives). A duty could blur the lines between the existing duties and responsibilities of each of the parties, including the firms.183

203.UK Finance also suggested that a duty of care would be unnecessary because other regulatory measures achieve the same outcome:

A number of perceived historic failures have been associated with an insufficiently strong culture within firms. In this regard, the introduction of a duty is unnecessary as the extension of the Senior Managers and Certification Regime (SMCR) to all FCA solo-regulated firms aims to ensure that a culture of doing the right thing by customers is embedded.184

204.Nisha Arora told the Committee that she was not convinced the actual words “duty of care” needed to be added to the FCA’s principles:

What we are exploring is whether other things need to be done, whether changes of words or changes to practice.185

When asked whether the financial services industry should mirror the duty of care required of solicitors to their clients, Nisha Arora stated:

Our Principle two talks about reasonable skill and care. The Consumer Rights Act already requires “reasonable care and skill”. If people are still telling us that is not providing the right outcomes for consumers, we want to understand why, what the gap is and what needs to be added.186

205.On 23 April 2019 the FCA published a feedback statement on its Duty of Care Discussion Paper published in July 2018. Most of the arguments both for and against a statutory duty of care were based on the assumption that individual consumers would have the ability to take court action to recover losses that resulted from a breach of that duty (i.e. be ‘actionable’).187 The feedback the FCA received in favour of creating a new legal duty of care stated it could:

trigger fundamental culture change within firms by creating a unifying, overarching standard of care that moves firms to ask ‘is this right?’ rather than ‘is this within the rules?
incentivise firms to anticipate and evaluate harm at every level of business and every stage of a consumer journey, and to take better preventative action.
create clarity for consumers about what they can expect and / or demand of firms, and give a single, overarching concept of care that is vital to rebuilding consumer trust in some sectors.
create clarity for the FCA, by acting as a general ‘baseline’ against which the regulator can take action in cases of new and emerging harms that may not be captured by existing rules.188

The FCA feedback stated those most in favour of a duty of care said it would be “a critical step towards restoring consumer trust. It has the unique capacity to drive change by providing an overarching, legislative standard of care that sits above the rest of the regulatory and legal framework, and to which everyone would have regard at all times”.189

206.The feedback the FCA received that was not in favour of creating a new duty of care stated that there would be:

difficulties in being able to consistently apply a single duty to the huge variety of firm/consumer relationships in financial services
duplication of existing obligations, creating legal complexity and confusion
legal uncertainty and delay, due to how quickly precedent would develop, and the sheer number of different firm/consumer relationships, sectors and products for which precedent would need to be developed before there could be real clarity
loss of regulatory agility, because if the pace and will of the courts were to determine the interpretation and application of the duty, then the regulatory environment would become less responsive, flexible and adaptable to change
perceived risk of stifling access, innovation and competition by making firms too cautious
cost, delay and stress of litigation for consumers
consumer confusion about multiple avenues of redress
perceived risk of a negative, adversarial effect on firm/consumer relationships, and of false claims.190

207.The FCA also stated that many respondents were not in favour of an outcome that meant customers would have to take providers to court themselves:

Those arguing against a private right of action said existing redress options, especially the Financial Ombudsman Service, were cheaper and more consumer friendly than litigation. They felt that the expense, stress and complexity of litigation mean it is not in consumers’ interests.191

208.In conclusion to its feedback the FCA stated its primary focus will be on considering:

reviewing how we apply the regulatory framework—particularly how we apply the Principles and how we communicate with firms about this, and
new/revised Principles to strengthen and clarify firms’ duties to consumers, including consideration of the potential merits and unintended consequences of a potential private right of action for Principles breaches.

The FCA said it did not consider the argument of those who wanted to introduce a legal duty of care as a “sufficient basis for making changes to primary legislation, which Parliament would need to make. However if, as part of our analysis, we take the view that there are substantive reasons for supporting a statutory duty, we will consider this further.”192

209.The FCA will publish a further paper in Autumn 2019 seeking detailed views on specific options for change.

210.All retail financial services, no matter which sector of the industry they operate in, should be acting in their customers’ best interests at all times. If the FCA is unable to enforce such behaviour in firms under its current rule book and principles, the Committee would support a legal duty of care, analogous to that in the legal industry, creating a legal obligation for firms to act in their customers’ best interests. While a legally enforceable duty might still require customers to take their own legal action to seek redress against a provider, its very existence would remind providers of their duty to act in their customers’ best interests at all times.

211.The FCA stated the feedback for its duty of care discussion paper would be published in early 2019 but it was published only in April. The Committee recommends that the FCA completes its consultation swiftly by Autumn 2019, with a clearly set out timetable of when changes to its rule book, principles, or legislation (if needed) will occur.

156 FCA, FCA Mission: Approach to consumers, July 2018

157 Q271

158 Q4

159 Evidence submitted by the Financial Inclusion Commission (CAF0052) Page 4

160 Evidence submitted by the Building Societies Association (CAF0022) para 7

161 Evidence submitted by the Financial Services Consumer Panel (CAF0060) para 9

162 Q271

163 Q273

164 Q274

165 Evidence submitted by UK Finance (CAF0044) Page 3

166 AMI (CAF0071)

167 Responsible Finance (CAF0056)