Banks fail vulnerable customers; most UK adults reluctant to disclose status

Banks continue to fail vulnerable customers, with more than half of vulnerable UK adults choosing not to disclose their status to their financial services providers, according to the Financial Conduct Authority (FCA).

The FCAʼs vulnerability review published last month revealed that one third of respondents felt too embarrassed to disclose their circumstances, and nearly a quarter also worried they might receive a worse deal if they did.

“It wasnʼt that long ago [that] a lot of firms were saying we donʼt have any vulnerable customers. And I have heard that and seen that as a reason for firms not moving forward and doing anything,” Helen Lord, chief executive of a not-for-profit platform Vulnerability Registration Service, said in a webinar on April 8. Identification and disclosure of vulnerability was the first step, she added, “then you have to identify what to do with those customers once you know theyʼre vulnerable”.

Vulnerable customer status is not limited to those with disabilities, but includes those who suffer from health conditions, negative life events, low financial resilience and low capability. The Covid-19 pandemic left one in two customers with at least one vulnerability characteristic, based on the FCA’s guidance for firms on the fair treatment of vulnerable customers.

The guidance was introduced in 2021 and followed by the Consumer Duty in 2023, which requires financial services providers to prioritise the needs of their customers, including those in vulnerable circumstances.

The latest review evaluated “good and bad practices” in line with the Consumer Duty standards, highlighting the need for UK financial services providers to improve their approach to customer relations and communications.

It found that a majority of vulnerable customers in the UK (58%) hide their personal circumstances from financial services providers such as retail banks or insurance companies. Among those who have disclosed they are vulnerable, just over half (52%) felt they were not encouraged by these providers.

The review identified embarrassment as the main reason (37%) why UK adults hide their vulnerability, which could be attributed to a lack of trust in providers. However, other reasons, such as “worried about a worse deal” (23%) and “do not know providers could take action” (16%), also showed the need for better communication from financial services firms.

“Negative communication experiences happen to all consumers from time to time, but the research shows that this occurs more frequently for people in vulnerable circumstances and, where it does occur, there is greater harm to consumers in vulnerable circumstances,” said the FCA review.

Training and education

The FCA also found that product or service design staff do not always receive training on vulnerability and rarely have access to information about the subject.

Speaking at the April 8 webinar, Jennifer Cahill, associate director at compliance consultancy Cosegic, explained: “Staff training on how to deal with vulnerable customers is very important. It can be very daunting for staff dealing with such situations, such as maybe talking to a bereaved customer — and itʼs at times like this that things are more likely to go wrong and the situation may not be handled well.

“[Staff] should be aware of what the processes are and how they can flex them to get the right outcomes for the customer — maybe having an experienced member of staff or a specialist support team available who they can call on for backup, or maybe they can transfer the customer to that particular area so [they] can get the help they actually need,” Cahill added.

Customer mistreatment penalties

Failure to identify vulnerable customers and to treat them fairly can be costly. The FCA has already taken action against UK banks, including fining Lloyds Bank £283 million in 2020 and HSBC UK £6.2 million last year.

The UK regulator issued a final notice to Lloyds for unfairly treating a “large number” of mortgage customers, including those who were likely to be vulnerable. By examining the bankʼs mortgage arrears handling procedures, based on a sample of 100 customer files from 2014 to 2015, the FCA found that 38% of cases involved unfair treatment.

Lloyds failed to “effectively engage with customers” to understand their personal circumstances, which could have led to inappropriate arrangements that worsened the customersʼ finances, or to avoidable home repossessions. Additionally, it failed to give call handlers “refresher training” or performance reviews with regard to dealing with vulnerable customers.

Meanwhile, HSBC UK received a final notice in May 2024 for failing to “show forbearance and due consideration” for at least 1.5 million customers who were in arrears or at risk of experiencing vulnerabilities. The FCA also noted gaps and weaknesses in training of front-line agents, who failed to pick up on cues, wordings or behaviours indicating circumstances of suffering.