What is 'vulnerability' according to the FCA?

• The FCA requires businesses to monitor customer vulnerability in the Consumer Duty.
• Vulnerability is when a customer is more susceptible to harm due to personal circumstances.
• The four characteristics of vulnerability are health, life events, resilience, and capability.
• Measuring vulnerability is challenging, as firms may not be directly informed of changing customer circumstances, and need to make judgements on the resilience and capability of a customer.
• However, monitoring vulnerability could also be a business opportunity, as it can enable earlier intervention with positive knock-on effects on arrears and defaults.

What is vulnerability?

Vulnerability occurs when a customer is especially susceptible to harm, given personal circumstances. They may be even more susceptible if the firm does not act with appropriate levels of care.
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The FCA has defined four key characteristics of vulnerability - personal circumstances that can lead to increased susceptibility to harm. They are:
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• Health: Health conditions or illnesses that affect a person’s ability to carry out day to day tasks.

• Life events: Major life events, like bereavement or relationship breakdown.

• Resilience: If a customer has a low ability to withstand financial or emotional shocks.

• Capability: Having low knowledge of financial matters, or a low confidence in managing money.

Health and life events are colloquially thought of as being characteristic of financial vulnerability - these are events that impact all parts of a consumer’s life, including their financial life. It is worth remembering that financial vulnerability can also come from ‘positive’ life events, such as buying a new house (leading to lower net income after mortgage repayments, potentially), or changing jobs.
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Resilience and capability are perhaps the more interesting characteristics. It is said that the average consumer in the UK has poor knowledge and understanding of the financial system. Firms need to be careful, and ensure they monitor these traits and build processes designed to prevent foreseeable harm to such customers, as opposed to leveraging these characteristics to their advantage.

What challenges are there in measuring vulnerability?

Vulnerability remains a difficult thing to measure, as it can require direct reporting from a customer, or subjective characteristic judgements.
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Health and life events can be easier to spot. For example, if a customer has a bereavement, this might show as a funeral home payment in their bank account transaction data. However, whether this event construes vulnerability is less clear cut. First, it is unclear to what extent this event will make the customer susceptible to financial harm. Furthermore, if the transaction data cannot be accurately analysed and detected, or the customer doesn’t inform you they have suffered this bereavement, there is a challenge in obtaining this information. In both instances, considerable ambiguity exists when detecting vulnerability.
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The challenge is even greater for resilience and capability, as there are less well-defined mechanisms in place for identifying such discrete changes, compared to health and life events. If one were to look at transaction data to try and detect such changes, what exactly would one look at? Even once this question is answered, the ambiguity issue above remains, and could be even more prevalent. 

Can businesses benefit from monitoring vulnerability?

Despite the above, businesses could see upsides to proactively monitoring vulnerability in their customers.
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First, if firms are able to monitor characteristics of vulnerability in their customers, they will be more aware of potential financial difficulty and foreseeable harm. This may provide opportunities for early intervention, whether in the form of simply getting in contact to understand the customer’s situation, and helping them rethink a repayment plan for any loan products. This has potential to improve margins, potentially lowering arrears and default risk.
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A potential second effect could be upon credit decisioning. As lenders improve their understanding of vulnerability and the effects it can have on their customers, they may be in a better position to detect and assess risk earlier in the customer life cycle. This may have a positive impact for the business, by increasing or improving their loans, as well as on the customer, by providing them better value.
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Find out more about how our Health Signals product is helping turn the Consumer Duty into an opportunity, rather than a cost centre, by scheduling a demo today.