The FCA’s Occasional paper no.8, published in 2015, raises concerns that many consumers in vulnerable circumstances are not receiving fair treatment from their financial services providers. More recently, the FCA's 2019/20 business plan builds on the previous year’s commitment to protecting vulnerable customers (see boxout). The regulator will provide more clarity about its expectations on vulnerable customers and share good practice from across the sector.
Financial Planning Conference 29 September to 1 October 2019: Book now to secure your place
And Just Group, which specialises in retirement products, has recently published research that shows that, out of 102 firms, the majority of advisers (65%) agree or strongly agree that they expect vulnerability to be formally supervised by the FCA within the next five years. 

Stephen Lowe, communications director at Just Group, explains: “It is a simple hygiene factor. Financial planners, advisers and wealth managers have to be good at dealing with vulnerable customers if they want to succeed in this market.”

CISI TV: Financial planning considerations for vulnerable clients
What vulnerable looks likeThe FCA defines vulnerable as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”.

Stephen says this is a broad definition and argues that effective identification and management of client vulnerability is not always a straightforward process. The FCA concedes that “vulnerability can come in a range of guises, and can be temporary, sporadic or permanent in nature”. It also notes that individuals may not recognise or accept that they are vulnerable.

The temptation may be to focus on the most visible and widely accepted understanding of vulnerability. Typically, this might be people in older age, those with dementia or apparent disabilities. However, Jacqueline Lockie CFP™ Chartered FCSI, CISI head of financial planning, says vulnerability is often hidden and may contradict our accepted understanding of those with specific needs.

“Too often, people think vulnerable clients are old, but that is a limited view. People can be temporarily vulnerable from illness or bereavement, or from unexpectedly coming into a large sum of money,” she says.

Regulatory requirements
The FCA expects all financial services providers to treat customers fairly. The principles of good regulation lay out exactly how financial planners, advisers and wealth managers should interact with customers.

Its Occasional paper no.8 states vulnerable customers are more likely to be treated unfairly and issued guidance on what firms should look out for. 

The FCA lists 11 examples of vulnerability:
1. Low literacy, numeracy and financial capability skills
2. Physical disability
3. Severe or long-term illness
4. Mental health problems
5. Low income and/or debt
6. Caring responsibilities (including operating a power of attorney)
7. Being ‘older old’ for example over 80, although this is not absolute (may be associated with cognitive or dexterity impairment, sensory impairments such as hearing or sight, onset of ill-health, not being comfortable with new technology)
8. Being young (associated with less experience)
9. Change in circumstances (eg, job loss, bereavement, divorce)
10. Lack of English language skills
11. Non-standard requirements or credit history (eg armed forces personnel returning from abroad, ex-offenders, care-home leavers, recent immigrants)

The FCA is not formally supervising on vulnerability but it is ramping up its focus on this area, and Stephen Lowe, communications director at Just Group, says financial planners, advisers and wealth managers should expect to see more formal regulation soon. 

The FCA 2019/20 Business Plan reinforces the regulator’s commitment to protecting vulnerable clients and promises greater clarity on its definitions of ‘vulnerability’ later in 2019. It states: “We will share some of the good practice we have seen with the aim to improve outcomes for consumers in vulnerable circumstances and to support firms and incentivise best practice. This work will provide a basis for us to monitor and assess firms’ practices, supporting the work we do through both supervisory and enforcement channels.”
They may have suffered a physical injury that has left them vulnerable, says Jacqueline, and after the external symptoms have gone, the financial planner, adviser or wealth manager may assume the client is back to their usual self. However, the reality is they could still be suffering mental health issues as a result of fallout from their injury. “These are the types of vulnerability that can be missed,” she warns.
Unique opportunityThe FCA’s Occasional paper no.8 (p.110) lists 11 examples of vulnerability (see boxout) and within each of those are numerous variations and subsets that make a client susceptible to financial challenges. 

As the FCA accepts, clients may be unwilling to mention or may not be aware of their own vulnerabilities. It is therefore down to the financial planner, adviser or wealth manager to ask the right questions and spot the signs.

For example, after a significant event such as a divorce, bereavement or illness, a client might exhibit changing personality traits. These might include becoming more or less inquisitive or vocal, asking the same questions repeatedly, or refusing to make a decision without the involvement of a friend or family member.

Fortunately, financial planners, advisers and wealth managers often know their clients extremely well, making it easier to spot the signs of potential vulnerability.

Keri Carter CFP™Chartered MCSI, managing director of Broadway Financial Planning, explains that the nature of her job – getting to know her clients on an in-depth level – aids spotting vulnerabilities. “We have dealt with our clients for a long time, so we are in a good position to recognise if there is a lack of response to what we are saying, or if they are glazing over.”

The same is true of wealth managers, who may also benefit from having access to the client’s wider family as part of intergenerational planning and managing the family’s estate. Erin Linehan, head of dispute resolution and at-risk and senior clients at wealth manager Raymond James, which specialises in identifying clients with vulnerability, says her colleagues are told to try to increase the number of face-to-face meetings with clients in cases of suspected vulnerability.

“Looking at clients is critical in making an assessment. You can spot changes in appearance, they might be less well groomed for example, and you can be more aware if other people are influencing them. You can also see if they appear more withdrawn or less personable,” she says.
Changing processesWhile financial planners, advisers and wealth managers enjoy special relationships with their clients, reliance on traditional approaches to those interactions may need to be updated.

There is a difference between the FCA’s estimations of client vulnerability and that recorded by advisers. The regulator says that half of all customers have potential vulnerability, yet Just Group’s vulnerable customer research finds less than 5% of clients recorded by financial intermediaries are deemed vulnerable.

The Just Group research notes that many firms leave front line staff alone to record vulnerabilities, which means “there is a vast swathe of the more difficult cases that are going unrecorded”. 

The four Rs
The FCA has no set process for how financial planners, advisers and wealth managers deal with vulnerable clients specifically. The regulator expects firms to treat all customers fairly in accordance with the principles of good regulation. 

However, Just Group suggests six steps ensuring wealth management and advisory firms have a robust approach to dealing with vulnerability:

1. Documenting your approach to dealing with vulnerable customers
2. Training to enhance understanding of working with vulnerable clients
3. Reviewing other existing documents to ensure they reflect your policy
4. Seeking feedback from clients on how to improve services offered
5. Considering the role of third parties and their ability to provide instructions
6. What other support advisers can offer clients to build connections with other professionals

Just Group also proposes the Four R’s approach for individual advisers:
1. Recognise – identify vulnerability
2. Record – make sure the client’s issues are stored on a central system that meets data protection rules
3. Respond – support the client appropriately and consistently
4. Report – be able to demonstrate to the regulator the steps take to protect the clientTo tackle the challenge, Stephen suggests training vulnerability champions. These individuals can provide leadership for other members of staff in spotting the signs, such as those going through divorce, or who have received a serious illness diagnosis, and ensuring the right steps are taken to protect all customers.

A good example of the effectiveness of vulnerability champions is provided in a case study by the Association of British Insurers. It explains how a call handler at insurer Scottish Widows had a mentor and experienced colleague who helped with a client who was deaf. 
It’s a team effortJacqueline welcomes the idea of champions but says it is important that firms do not rely on one or two individuals to manage vulnerable clients. She notes that all financial planners, advisers and wealth managers should have the requisite skills to spot clients’ changing circumstances.

“If you do have specialists in working with vulnerable clients, the cost of the advice would go up,” she explains. “There would be fewer advisers in the country, which would reduce access to good quality advice to those people who are already vulnerable.”

Since the difficulties of spotting vulnerability are so many, Erin from Raymond James suggests firms be more proactive by ensuring procedures are in place before a client becomes vulnerable. For example, alongside the standard power of attorney, wealth managers and financial planners could establish a trusted contact that the client has agreed can be approached with any concerns.

Erin is clear that this does not mean confidential financial information is shared or that any data regulations are breached. “It is possible to be proactive and have early conversations to make sure the financial planner, adviser or wealth manager knows who they can speak to. Some clients may be reticent initially, but a carefully planned family meeting that doesn’t include details of money really provides consistency of planning.”

In cases where the financial planner, adviser or wealth manager feels unqualified to make a judgement on a person’s vulnerability, Keri recommends referring the client for an expert assessment. She says: “We have referred clients to a memory clinic where we have perceived a change in their ability to remember details.” A memory clinic has specialists that can help diagnose people with dementia. 
Relative supportBovill, a global financial services regulatory consultancy, has the example of a 62-year-old client called Maureen, whose husband Brian passed away recently. Brian had been the sole breadwinner and had taken responsibility for the finances, leaving Maureen a substantial life insurance policy and spousal pension.

Maureen has no financial knowledge and, since grieving, is especially vulnerable. Maureen’s financial adviser asked her to nominate a relative or close friend to accompany her to any financial meetings. The adviser also agreed that any financial advice should be offered over a number of meetings to allow sufficient time to reflect on any decisions taken.

International rescue
The FCA is not alone in championing vulnerable clients.  The French FCA equivalent – the Autorité des Marchés Financiers (AMF) – released a report in December 2018 tackling ‘cognitive decline’ in elderly customers. The regulator is examining feedback to a consultation that closed in February this year which focuses on equipping financial firms with the tools to protect ageing customers when they become more vulnerable.

The US regulator FINRA is also committed to guarding elderly savers and investors. In April 2018 the regulator issued new rules requiring brokers to add a trusted-contact person to clients’ accounts and allows firms to suspend accounts where they believe ‘financial exploitation’ has occurred. There are also situations where financial planners, advisers and wealth managers can take positive action to support clients who have become vulnerable as a result of scams. Keri says she personally accompanied a client directly to their bank to sort out the aftermath of a fraud.

“My client didn’t want her family to worry about what had happened. It is part of the job to take care of a client’s wellbeing and do what we can to be a trusted support,” Keri explains. However, inviting relatives to provide support to vulnerable family members opens up the possibility of a conflict of interest. Where the relative is a prospective beneficiary of the vulnerable person, there may be questions about the integrity of support given, and decisions made, which opens up financial planners to legal challenge by other disenfranchised beneficiaries.
Beyond regulationEveryone who works with vulnerable clients must wait to see if the regulator imposes specific stipulations regarding managing vulnerable clients, but in the meantime, there is no reason why internal processes cannot be formalised. Erin says every firm should be going beyond regulations to ensure they get the best for all their clients.

She says: “We are aware of the requirements legally, but a good firm will always go that extra mile because it cares about its clients’ wellbeing and wants to protect them, the advisers, and the firm.” Documenting a process for dealing with spotting and supporting vulnerable clients is a must, says Jacqueline. 

All clients can become vulnerable. Financial planners, advisers and wealth managers must be equipped to recognise the signs of vulnerability such as job loss, relationship breakdown, illness and family trauma, and have adequate measures in place to deal with a variety of challenges. They should also be aware that temporarily vulnerable clients can recover. 

Whether or not the FCA chooses to regulate on this area in future, protecting vulnerable customers should be a key priority for all financial services firms.

Seen a blog, news story or discussion online that you think might interest CISI members? Email bethan.rees@wardour.co.uk.