Financial crime compliance is a complex mix of protecting financial institutions, their customers and society at large from involvement in criminal activity. Within this wide scope, there is one group which requires particular attention: vulnerable customers. This blog will look at the regulatory meaning of this term, why it’s important to understand various types of vulnerability in the financial landscape, and what fincrime compliance officers need to think about.
Vulnerability can stem from a multitude of factors including age, mental or physical health, financial literacy, or life events such as divorce or bereavement. The 2020 Financial Lives Survey found that 46% of UK adults (that’s 24 million people!) showed one or more characteristics of vulnerability. According to a recent survey by NICE International, about 17% of customers in the UK self-identify as vulnerable, while as many as 67% of customers could potentially be classified as vulnerable when assessed against the Financial Conduct Authority’s (FCA) criteria.
According to the FCA, a vulnerable consumer is “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”.
Understanding vulnerability
Below are the FCA’s four drivers of vulnerability along with their associated characteristics:
An elderly individual navigating complex investment schemes, a college graduate drowning in student debt, or a recently widowed single parent juggling bills with a meagre income. Any customer could require additional assistance, but certain situations increase the likelihood of this need. Vulnerable customers are not just statistics; they're real people facing real challenges.
According to a recent survey by the Vulnerable Registration Service, where vulnerability exists, exploitation often follows. Criminals capitalise on the weaknesses of vulnerable customers through fraud schemes, misleading lending practices, coercive tactics or embroilment in money muling - using deceptive or coercive tactics at a time when their victims’ defences are weakened. It is an unfair situation where the most vulnerable people end up suffering the most. And the repercussions of financial exploitation extend far beyond monetary loss, leading to a lack of trust in banks and severe emotional stress.
Consumer Duty: Safeguarding the vulnerable
The FCA stresses the importance of protecting vulnerable customers through its guidance and consumer duty principles. Financial institutions must ensure good outcomes for all consumers, especially those who are vulnerable. They need to identify vulnerable customers, understand their needs, and provide appropriate support including risk assessments and tailored assistance. The Consumer Duty requires senior management to embed these principles into their business practices and demonstrate how they put customer well-being at the heart of their decisions and business strategies.
This approach aims to protect consumers and build trust and confidence within the financial services sector. By adopting the Consumer Duty principles and focusing on transparency, accountability and fairness, firms can provide a positive experience for customers and achieve long-term success in a competitive market. This means carefully monitoring customer results, using feedback systems, and constantly updating practices to meet changing customer needs.
How to identify and support vulnerable customers
To identify vulnerable customers, both interactions with customers and more technological methods such as data analytics can be used. Signs of vulnerability can be detected through transaction analysis, including:
Erratic spending
Frequent late payments
Other patterns that deviate from the customer’s usual behaviour
This monitoring can supplement, and be supplemented by, the work of trained customer service teams who can learn to identify signs of vulnerability such as confusion, stress or difficulty understanding financial products through behaviour, communication patterns, and customer disclosures.
Once firms have identified vulnerable customers, creating dedicated support teams and performing regular account reviews are essential steps in preventing exploitation. When a customer is at particular risk of fraud, for instance, quick and decisive actions are crucial — this includes freezing suspicious transactions before money is lost. Throughout any subsequent investigations, firms must communicate clearly with the customer, and can consider offering financial education and guidance to help them avoid future attacks and rebuild their financial security.
Vulnerable customers may also struggle with firms’ standard procedure and controls. They may not have valid forms of identification, or may not be able to use automated identity verification solutions. In such cases, alternative documents and manual options such as submitting physical documents or using phone or video calls should be provided to ensure inclusivity. Good examples of using alternative identification processes are given in the FCA Handbook. Customer service representatives should be trained to guide customers through these processes and offer comprehensive support, ideally with a choice of phone, email, and live chat, as well as in person where possible.
James Nurse, Managing Director at FINTRAIL, recently shared his insights on BBC Radio 4's MoneyBox programme. He commented on the case of an elderly couple who had trouble meeting due diligence requirements. Despite their efforts, their account was closed because they were unable to provide an updated photo ID or passport. The story highlights the needs for clear guidance on the use of non-standard identity documentation to help vulnerable people who don't have the usual documents needed to access banking and financial services.
FCA evaluation
Currently, the FCA is engaged in an open evaluation concerning the treatment of vulnerable customers by financial firms. In May it issued a 40-part questionnaire asking for information on how financial services firms identify vulnerable customers, and how they design products and communications to meet client needs and measure outcomes. The assessment seeks to gauge the efficacy of current practices and policies, and will assess whether the outcomes experienced by vulnerable consumers are equitable compared to those of others.
By scrutinising firms' treatment of vulnerable customers, the FCA aims to identify any shortcomings or areas for improvement within the industry and to drive positive change that enhances the overall experience and outcomes for vulnerable individuals. The findings of this review, expected to be published by the end of 2024, will likely inform future regulatory guidance and initiatives aimed at promoting greater inclusivity and protection within the financial services sector while maintaining appropriate financial crime controls.
Conclusion
Financial services firms must understand the unique risks of money laundering and fraud vulnerable customers face, and how their fincrime controls may inadvertently discriminate against such customers. They need to evaluate the effectiveness of a range of control mechanisms, both traditional and innovative, to find a balanced solution. This requires strong risk management tailored to the specific needs of vulnerable individuals. By doing thorough assessments and implementing tailored controls, they can better protect the financial well-being and security of these customers while mitigating financial crime risks appropriately.
At FINTRAIL, we leverage our deep financial crime risk management expertise to support clients in treating vulnerable customers effectively. We help our clients:
Create robust policies and procedures
Refine and enhance their your systems and processes
Reduce fraud exposure
Engage in targeted training
Our approach includes identifying and mitigating risks relating to vulnerable customers, and ensuring their protection through flexible yet robust controls.
If you’d like to find out more about our services, please get in touch.