Recognising vulnerability
Financial vulnerability is rightly a huge focus for the entire financial services sector. Defined by the FCA as “someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”, providers are required to take into account the health, resilience, capability, and life events of customers. So factors go far beyond physical or mental disabilities, and can include marital status, gender disparity, employment status, and the extent to which they rely on other family members for financial support.
It’s a complex landscape to navigate, and one that is often in a state of flux. Crucially, regulation around vulnerable customers will only become more entrenched, meaning that advisers will come under increasing scrutiny. Understanding their role and how to approach it is key.
For advisers, the scale of the challenge can seem vast. But they do not have to try to do it alone, and there are some key steps that they can take to help ensure that the service they provide to clients is properly aligned with specific requirements.
An expanding challenge
‘Vulnerability’ is more than just a label. It is likely to significantly impact peoples’ financial challenges and requirements, shaping the advice and products that are best suited to their financial planning needs.
Broadly, there are two brackets. Firstly, there are those who are explicitly vulnerable. This may include disability but also encompasses financial capability, i.e. financial know-how, the ability to manage money, and even whether people are homeowners or renters.
The second bracket is those who, while not vulnerable, will experience ‘moments of vulnerability’. Within that group, there are clear trends among demographics and life stages. For example, negative life events, such as bereavement or the breakdown of a relationship must be navigated with equal care and due diligence.
That goes some way to explain why the most common vulnerability is financial resilience. And that pool of vulnerable customers is growing. The UK has seen a 16% rise in financial vulnerability since 2022, meaning that at least 20.3 million people are now living in financially vulnerable circumstances. Fair4AllFinance now estimates that 2.7 million people are falling into difficulties.1
Why it matters
Such vulnerability risks tangibly impairing financial outcomes. Vulnerable individuals are more prone to debt, often possess less financial knowledge and confidence, and have lower levels of digital literacy.
They are also likely to be less resilient i.e. less equipped for financial shocks. They frequently lack insurance or protection, and are less likely to hold credit cards and mortgages. Many also opt for unsecured buy-now-pay-later options or loans, complicating efforts to overcome vulnerability.
There is also a clear link with paying the so-called ‘poverty premium’, incurring additional costs for necessities such as energy, credit and insurance. This figure is often staggeringly high - over £2.8 billion per year in the UK alone2. It can be a vicious circle, aggravating poverty by increasing the financial burden facing low-income households who struggle to manage budgets.
Building resilience
Only when advisers have an accurate picture of their clients’ circumstances and challenges can an appropriate financial plan be put in place. So it’s essential that advisers understand the particular vulnerabilities of each client, anticipate those moments of vulnerability, and tailor their conversations as well as their advice accordingly.
This process can be hugely aided by advisers who keep in mind the below:
- Be aware of vulnerability types: The signs of vulnerability may be difficult for advisers, and sometimes even clients themselves, to recognise. It’s essential to understand what to be on the lookout for.
- Give clients the time to speak: Giving clients space for conversation and developing an holistic understanding of what is going on in their world provides advisers the best chance of identifying these vulnerabilities.
- Update client information regularly: Keeping detailed information of client circumstances, whether vulnerable or not. Consent is needed around what information is collected, but doing so can help spot changes in behaviour and act as an alert to vulnerability.
- Tailor communication to need: Everyone has different preferences for receiving and retaining information. Adapting methods of communication to each client should ensure that they’re able to properly digest information.
- Conduct regular vulnerability assessments: Regularly checking in with clients about their comprehension of their financial planning to make sure it’s fully understood.
As the waves of Consumer Duty ripple through the industry, the advisers who become most vulnerability-inclusive will be the most effective in the eyes of their clients, their peers, and the regulator.
Sources:
2https://www.jrf.org.uk/cost-of-living/social-investment-and-innovation-tackling-the-poverty-premium