The FCA’s 2017/18 Business Plan emphasised its work on behavioural economics and highlighted its expectations around what it means to treat customers fairly, with a particular focus on firm’s responsibilities towards vulnerable customers. Phil Deeks, TCC’s Technical Director, outlines the importance of considering behavioural economics when addressing consumer vulnerability within their systems and sales process.
With different groups in financial services having different needs, understanding the different types of vulnerability is of particular importance. Consumer vulnerability has become a particular hot topic, with the FCA making their expectations clear that firms must to implement more effective systems and processes which aim to treat all customers fairly.
Regulation has moved away from tick box compliance and is now centred on conduct and investing time in delivering the right outcomes for customers. The FCA is concerned about whether firms have the right culture to deliver this, along with a sustainable business model. Firms that have a good culture and the right business model are likely to already be considering the behaviour and vulnerability of their customers.
Firms should take the time to analyse their business model and end-to-end customer journey to positively address the issues vulnerable customers may experience, from issues associated with old age and reduced mental capacity to temporary situations such as bereavement and stress.
FCA takes inspiration from U.S. consumer finance watchdog
The Consumer Finance Protection Bureau (CFPB), the U.S. consumer watchdog has been a source of inspiration on how the FCA could mould its approach to vulnerable customers and duty of care. The CFPB has begun to take action against firms found to be exploiting or overcharging vulnerable groups.
In its approach to MiFID II the FCA emphasises the need for firms to design products that genuinely meet customers’ needs from the outset. This reflects back to the FCA’s recommendation that firms to use behavioural economics to understand their consumers, with the aim of providing customers with clear communication around what products are for and what they are not. With its mission statement highlighting the need for consumer vulnerability to be taken into account, the CFPB’s approach is close to one that the FCA is wishing to adopt.
How behavioural economics can influence the FCA’s activities
The FCA has been trying to understand for a number of years how behaviours and biases can inform consumer’s decision making when investing in financial products and services. In an attempt to address key areas such as conduct and culture, treating customers fairly and mis-selling, the FCA’s consumer protection mandate, the regulator aims to foster an industry that meets consumers’ needs and results in fair outcomes.
Another key statement outlined in the FCA’s business plan is its concern around the fair treatment of ageing or vulnerable customers, especially due to the rise of online banking and the reduction of branches across the UK.
In the past firms have failed to use insights from consumer behaviour to understand how consumers make decisions when purchasing financial products. Consumers’ financial capability can be affected by elements such as impaired cognitive ability and financial resilience, which are vulnerabilities that firms need to be actively addressing. A particular need for more information around products is evident, as policy makers have claimed consumers lack a good knowledge of products. Firms should be providing information in a clear and accessible format to ensure consumers are able to make effective choices.
Firms should already be acting in the best interest of consumers, supported by a culture of delivering consistently positive customer outcomes. The main priority now is for firms to effectively define their processes around vulnerable customers and put effective systems in place to ensure it is adhered to across the business.
The FCA has proposed to produce a paper around the issue of duty of care in the near future.