Throughout the last 12 months, banks have struggled to support their most vulnerable customers. It’s been a difficult period for UK residents – dramatic rises in energy prices, which fed into the cost of living crisis, meant that those impacted most were people on the cusp of, or already being defined as, a ‘vulnerable customer’.
According to KPMG, the UK economy will likely escape a recession. This is thanks to a better outlook for energy prices, a more resilient global environment, and continued tightness in the labour market. However, they expect growth to remain weak, with real GDP at just 0.3% in 2023, rising to 1.1% in 2024. This is in comparison to figures in 2021 and 2022 where real GDP output was around 4.0% in 2022, following growth of 7.4% in 2021.
Although the economic outlook seems to be steadily improving, that will not erase the financial challenges people have been facing, nor does it mean that those issues will just disappear, or revert back to a time where financial stability felt more in grasp.
The Bank of England (BoE) recently released data that showed families took out £4.6bn last month to help them cope with the cost of living crisis. This is the highest level of withdrawals since the BoE started collecting the monthly data in October 1997. The figure suggests that those able to do so are running down their funds to sustain living standards, or to pay off mortgages or loans.
To help those struggling with the cost-of-living, the New Consumer Duty should pressure financial institutions to act more proactively. On July 31st 2023, the FCA’s New Consumer Duty will come into effect to ensure that businesses providing financial services or products are equipped to identify and support those at risk of harm because of their financial circumstances .
Looking after financially vulnerable customers requires the right tools, expertise and care to design systems, collect and analyse the right data, whilst fostering a proactive, ethical internal culture and a sensitive, customer-centric approach. The reality is that many companies will need time to adjust and implement proper tools to service this subsect of customers. Yet, fast execution will be needed to address the problem as the knock-on effectds within families, communities and more widely society is swift, if not immediate.
So, how do we define vulnerable customers?
Institutions must understand the needs of their customers. Behavioural patterns can be proactively identified to help them understand a customer’s financial state as financial vulnerability can take on many shapes and forms. Some situations that can be cause to believe someone is financially vulnerable include:
- Someone that lacks the experience or knowledge to manage their finances in a way that allows them to cope with financial shocks.
- A person living with a physical or mental health condition that makes them less able or capable of managing their finances.
- Not having financial resilience in the form of an emergency fund to cover a few months of essential household expenses.
- Someone that experiences a major change in their circumstances (a life event) that destabilises the balance in their income and expenses for a period of time.
Although this list isn’t exhaustive, these are some key scenarios that can drive financial vulnerability.
What is the FCA’s Consumer Duty trying to achieve, and what are the next steps?
The pace of the conversation around the pitfalls of traditional financial services has picked up a lot over the last decade. The focus on trends tends to be cyclical as the finance industry learns and evolves – it has been a long time coming that vulnerable customers are considered a high-priority item on a regulatory level.
Every business should be mindful of the ethics around providing financial services and products to customers, plus the impact that it can make over the months and years on the person who uses the product or service itself. Yes, revenue needs to be generated, but understanding the societal cost of that revenue is critical. The 52 million financial services consumers in the UK rely on the sector to deliver good outcomes, and should be protected from harm.
This should not be seen as a ‘tick box’ exercise for firms. This should be treated as, by everyone, a shift in the current culture and relationship between financial services and consumers.
Here are a few key points everyone needs to know:
- For new and existing products or services that are open to sale or renewal, the Duty will come into force on 31 July 2023. For closed products or services, the Duty will apply from 31 July 2024.
- Purpose and culture needs to align with the obligations under the Duty and support the delivery of good outcomes for customers.
- Every function of the business needs to be involved with discussions around how strategy, risk and remunerations aligns with the Duty.
- Teams need to keep abreast of the external economic environment and ensure that the business is doing right by the customer.
Although a lot of this seems faith-based on the premise that businesses will keep themselves honest, the FCA will prioritise the most serious breaches and act swiftly and assertively where it finds evidence of harm, or risk of harm, to consumers. Therefore, it is worth keeping the Duty front of mind from the moment products are specced out, all the way to the manner of which it is marketed and sold to customers.
If you, or your business, wants to know more about what Kalgera is doing to support firms with the FCA’s Consumer Duty, do get in touch.
Kalgera, a London-based RegTech, is the first line of defence for financial institutions who want to actively support its most vulnerable customers. By helping the finance sector identify customer vulnerability through transactional data, Kalgera creates better outcomes for the customer and the financial institution itself.
We are committed to working with banks through several avenues to comply with the FCA's Consumer Duty Act. Kalgera’s state-of-the-art technology uses 11 parallel AI models to pinpoint vulnerability to financial abuse and low financial resilience with greater precision.