The recent guidance from the FCA on the fair treatment of vulnerable customers was wide ranging in its scope, and therefore in the potential risks for financial services firms. The definition of what constitutes vulnerability was far wider than most firms apply. Equally the expectations for the areas of the business which should be considering their impact on vulnerable customer was much broader than the traditional focus on customer-facing staff.
As is commonplace, it has traditionally fallen to Second Line Compliance departments to interpret the requirements, and to cajole and challenge First Line Operations to address them. However, this common approach misses the role of Second Line Risk in the process, and in doing so weakens the firm’s controls.
The treatment of vulnerable customers should not be considered a separate category of risk, within the taxonomy (as, arguably Conduct Risk should not either). But the breadth of expectation from the FCA means it impacts many risk categories. And, in doing so, should be front and centre on the Risk function’s radar.
Regulatory and Legal risk clearly, but also:
· Operational risk – it is within Operation’s touch-points with customers that failings will occur
· Third party risk – outsourced providers, distributors and manufacturers are very much in scope
· Business risk – there is an explicit expectation that firms should consider the needs of vulnerable customers within their future plans and business models
Again, the identification, quantification and monitoring process is unlikely to be effective if there is a merely single risk on the register for ‘vulnerable customers receive poor outcomes’. Far better to take a granular approach and apply the ‘vulnerable customers lens’ across all RSCA activity: ‘the risk that vulnerable customers receive poor outcomes in [insert relevant business function]’.
This granular approach enables Risk to take a holistic view, and aggregate up to a true risk quantification, across the organisation. But, also, be able to drill down into individual hotspots.
Vulnerable customers come in many guises and have many different needs. So, the controls that reduce the risk of their poor outcomes should be owned by many functions within the business.
Frank Brown is Practice Lead at Bovill