Consumer duty regulations require firms “to deliver good outcomes for retail customers”. As the need to regulate suggests, customer outcomes have sometimes come second to other goals, such as maximising revenues or reducing risk.
The Financial Conduct Authority has gone out of its way to point out that treating the consumer duty as part of the risk or compliance function of a firm is not good enough.
The consumer duty has to be fundamental to everything that advisory firms undertake with their clients. The three cross-cutting rules of the regulation underscore that. They require that firms:
- act in good faith towards retail customers;
- avoid causing foreseeable harm to retail customers; and
- enable and support retail customers to pursue their financial objectives.
While it is clearly right that firms should get a good outcome for customers, that can be challenging – particularly when advisers are dealing with pension transfers for vulnerable customers.
What makes for vulnerability?
The FCA defines a vulnerable customer 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”.
Anyone can become vulnerable, and vulnerability may not be immediately obvious.
Some of the common triggers for vulnerability are poor health, cognitive impairments, major life events such as having a baby, low financial or emotional resilience, and poor literacy or numeracy skills.
Not all customers who have these characteristics will experience harm. But they may be more likely to have additional or different needs. For example, someone who is older might only be able to make decisions or properly represent their own interests when information is presented slowly and clearly.
So, enhanced levels of care may be appropriate for these consumers, especially when, for some, the pension scheme will be their only retirement provision aside from their state pension.
What the FCA wants to see
The FCA has stated that firms should be alert to potential indicators of vulnerability when advising on transferring a defined benefit pension scheme or other pension benefits.
But to fully understand and properly advise a client who wants to make a pension transfer, advisers should also consider that clients:
- may be worried about the financial situation of their DB scheme’s sponsoring employer;
- may be concerned about the solvency of their DB pension scheme;
- may have heard their DB scheme is at risk of going to the Pension Protection Fund; or
- may be in serious financial difficulty due to the cost of living.
People who, rightly or wrongly, are concerned about the safety of their pension, or who find themselves under financial pressure, can be susceptible to scams or fraud.
There are some clear warning signs that a customer may be more vulnerable to scams or fraud, including:
- they may appear overconfident in their decision-making despite limited knowledge of pensions or investments;
- they may not be fully engaged with personal life events;
- they may be experiencing financial dissatisfaction;
- they may be in cognitive decline, or socially isolated, or lonely; or
- they may appear agitated about arranging the pension transfer and in a hurry to do it.
How can firms ensure a “good outcome” when dealing with pension transfers for vulnerable customers?
Adequately trained and skilled staff, using the right systems and controls, are the bedrock of supporting vulnerable customers. Staff must be able to:
- recognise and respond to any characteristics of vulnerability in line with customers’ needs; and
- recognise how having characteristics of vulnerability might impact a consumer’s behaviour or decision-making and provide appropriate support.
The processes should be both flexible enough to be tailored to individual client needs and thorough enough to identify signs of vulnerability.
That means including clear questions to probe vulnerability and examples of what it looks like.
