How Does the FCA Define a Vulnerable Customer? 4 Key Drivers of Vulnerability

In short, the FCA sees vulnerable customers as individuals who, due to their personal circumstances, may be especially susceptible to harm when dealing with financial services providers. This can result from physical, mental, or economic conditions or even temporary life events.

Companies and financial advisers must identify and support these customers, especially since they may be at a higher risk of making poor financial decisions or struggling to access the support they need.
Let’s start with a look at the FCA’s guiding principles, and we’ll use real-life examples along the way to keep things grounded and practical.

The FCA’s Definition of Vulnerable Customers

According to the FCA, a vulnerable customer is anyone who, due to personal circumstances, is at a higher risk of suffering harm. Vulnerability could be related to health issues, significant life events, low financial resilience, or low capability in terms of understanding financial matters.

These factors can hinder a customer’s ability to make informed decisions or fully understand the financial products they’re using. The FCA stresses that vulnerability is often not a fixed state—someone may move in and out of vulnerability based on changing life circumstances.

The FCA’s definition is broad on purpose. Here's why:

In October 2024, the FCA reiterated that firms don't need to rely exclusively on this definition but should have processes in place to recognise the vulnerability and act accordingly to support such customers.

Four Key Drivers of Vulnerability

The FCA breaks down vulnerability into four main drivers that firms should consider:

1. Health – This includes both physical and mental health conditions that may affect a person’s ability to manage or make decisions about their finances. Examples include chronic illness, cognitive impairments, or mental health struggles.
2. Life Events – Major life changes like bereavement, divorce, or job loss can create periods of temporary vulnerability, affecting the way people interact with financial services.
3. Resilience – This encompasses an individual’s financial and emotional resilience. Someone with low financial resilience might struggle to cope with a sudden expense or income shock.
4. Capability – This covers customers with low financial literacy or limited digital skills, making it harder for them to understand complex financial products or access services.

Each of these drivers reflects a different potential source of vulnerability. For instance, someone who has just lost their job might fall into the "life events" category, as their reduced income impacts their ability to manage expenses and debt effectively. By recognising these drivers, companies can better tailor their services to meet vulnerable customers' needs.

But here’s the kicker:

The Issue of Multiple Vulnerabilities

One of the biggest challenges in identifying and supporting vulnerable customers is that vulnerabilities rarely exist in isolation. According to FCA research on vulnerable customers, more than half of vulnerable customers experience multiple drivers of vulnerability at the same time.

This is important because financial services staff often focus on a single visible vulnerability and tailor their support accordingly. However, by doing so, they might overlook equally significant or even more pressing challenges that the customer faces.

For example, a customer who has recently lost their job (a life event) may also struggle with mental health issues (a health vulnerability), impacting their financial resilience and decision-making ability.

To truly fulfil the duty of care to consumers, firms must take a holistic approach, considering all potential vulnerabilities rather than addressing only the most obvious ones. Training frontline staff to recognise and manage multiple vulnerabilities will lead to better outcomes for customers and improved compliance with FCA expectations.

Why Does Vulnerability Matter?

Why should firms pay particular attention to vulnerable customers?

For starters, research suggests that one in four UK adults may experience some form of vulnerability at any given time, meaning that vulnerable customers are not a rare occurrence. Moreover, failing to recognise vulnerability can lead to severe consequences for the individual, such as financial hardship or distress.

From a business perspective, mismanaging vulnerable customers may damage a company’s reputation and result in regulatory penalties, hence the need for proper compliance.

The FCA has also observed that some financial firms may inadvertently or knowingly exploit vulnerable customers by pushing products that may not be suitable for them. This exploitation has prompted the FCA to issue stricter guidance on the treatment of vulnerable customers.

Vulnerable Customers in Practice

Identifying vulnerability isn’t always straightforward, as people may be reluctant to disclose personal difficulties. Firms are encouraged to look for signs of vulnerability and act proactively. Here are a few practical examples of how this vulnerability might present itself and how financial advisers can respond:

Example 1: Health-Related Vulnerability

Consider Sarah, a customer diagnosed with early-stage dementia. She’s always managed her finances independently, but lately, her memory lapses have led to missed payments and confusion about her accounts. Without proper support, Sarah is at risk of falling into debt or even becoming a victim of financial fraud.

How should a firm respond? The FCA recommends that companies train frontline staff to recognise signs of cognitive decline. Staff should be prepared to adjust their communication style, perhaps using simpler language and offering repeated explanations as needed. Many firms might also assign a dedicated support advisor for customers like Sarah to ensure consistent and understanding service.

Example 2: Vulnerability from Major Life Events

Imagine John, a long-time customer who recently lost his spouse. In addition to grieving, John finds himself overwhelmed by the financial responsibilities he now faces alone, from managing household bills to understanding investment portfolios he and his spouse previously handled together. During a routine call with his bank, John sounds stressed and uncertain, struggling to make decisions about his finances.

A good response here would involve empathising with John’s situation and possibly arranging for a specialist to help him sort through his financial options at his own pace. Some firms may even create a "bereavement protocol" that ensures customers like John get the emotional space and practical support they need during this difficult time.

What Does FCA Guidance Suggest?

In recent years, the FCA has made it clear that firms must go beyond simply identifying vulnerable customers—they should also design services that cater to these customers’ specific needs. Firms should:

• Train Staff: Staff, especially those on the frontline, should be trained to spot signs of vulnerability and respond appropriately.
• Tailor Communication: Information must be clear, accessible, and tailored to customers’ circumstances.
• Provide Flexible Options: Vulnerable customers may need more flexible payment options, extended deadlines, or access to specialised customer service support.
• Establish Internal Policies: Companies should establish clear, well-documented policies that guide employees in supporting vulnerable customers.

The FCA’s guidance also warns against "one-size-fits-all" solutions, as vulnerabilities can vary significantly from person to person. For instance, a person with mental health challenges may have vastly different needs compared to someone facing financial difficulties. Tailored approaches can help firms address these unique circumstances, ensuring fair treatment and positive outcomes for all customers.

The Importance of Protecting Vulnerable Customers

So, how does the FCA define a vulnerable customer? To recap, here are some essential points for firms working with vulnerable customers:

• Understand the Four Drivers of Vulnerability: Health, life events, resilience, and capability.
• Be Proactive: Identify signs of vulnerability, even when customers don’t explicitly disclose them.
• Communicate Empathetically: Use clear, respectful, and patient communication tailored to each customer’s needs.
• Offer Flexibility: Provide flexible payment options, timelines, and alternative solutions where possible.
• Train and Equip Staff: Ensure that all employees, from frontline staff to senior management, understand vulnerability and know how to respond effectively.

Financial firms that focus on these practices can make a substantial difference in their customers’ lives and align with FCA requirements, fostering trust and a positive reputation within the industry.

Addressing the needs of vulnerable customers isn’t just a regulatory box to tick; it’s a core responsibility of ethical financial services. When companies take the time to understand, recognise, and cater to these unique needs, they contribute to a more inclusive and supportive financial system. The rewards are clear: fewer complaints, improved customer satisfaction, and a stronger brand reputation.

Interested in learning more?

For a comprehensive guide to managing vulnerable customers effectively, see our course on Vulnerable Customers. In this course, we’ll dive deep into the FCA’s guidelines and provide actionable strategies to help you identify and support vulnerable individuals across various financial sectors. This training will give you the confidence to create meaningful policies, improve customer experience, and align with the FCA’s expectations on vulnerable customer treatment.

FAQ

What defines a vulnerable person under the Care Act 2014?

Under the Care Act 2014, a vulnerable person is defined as an adult who has care and support needs, is experiencing or at risk of abuse or neglect, and cannot protect themselves due to their care needs. The Act places a duty on local authorities to assess and provide support to such individuals to help prevent harm, improve well-being, and promote independence. It emphasises safeguarding and empowering individuals in vulnerable situations.