How Covid has changed our financial lives
The FCA's Financial Lives survey is the regulator's flagship survey of UK consumers.It tracks consumers' attitudes towards managing their money, the financial products they have and their experiences of engaging with financial services firms.
Last month the FCA published the key findings of its Financial Lives 2020 survey, looking specifically at the impact of coronavirus.
The latest Financial Lives survey ended in February 2020, so to test how the pandemic had affected UK consumers the regulator ran a follow-up Covid-19 panel survey last October with over 22,000 respondents.
The research looks first at how the market has evolved since the first Financial Lives survey in 2017 to early 2020.
In particular, it focuses on how many UK adults had low financial resilience or weren't otherwise able to deal with the financial impact of the pandemic. The FCA then goes on to look at the impacts of Covid-19 on UK adults’ financial lives, drawing largely on the Covid-19 survey.
The data serves as a useful way of reflecting on identifying vulnerable clients and how they will be treated throughout your firm's advice process.
The changing picture on vulnerable clients
The FCA stressed in its report that all consumers are at risk of becoming vulnerable, and therefore at greater risk of harm.
This is particularly the case if they display characteristics of vulnerability to do with poor health, a life event such as a bereavement, or have low financial resilience or capability.
In 2017 the FCA found that 51 per cent of adults showed one or more characteristics of vulnerability, falling to 46 per cent, or 24 million people, by February 2020.
Between March and October last year and as a result of Covid-19, the FCA now puts the number of vulnerable consumers at 27.7 million people, taking the proportion to 53 per cent of all adults.
As an aside, it's interesting to note that the fall in the run-up to February 2020 of vulnerable consumers is partly down to fewer people being digitally excluded.
Older people aged 75 and above saw the largest improvements in digital inclusion between 2017 and 2020, going from 41 per cent considered 'digitally active' in 2017 to 64 per cent in 2020.
Many of us, including older people, will have been encouraged to use technology to keep in touch with family and friends during the pandemic.
So if they weren't using a remote advice service already, this may mean they are perhaps expecting or are more receptive to one in future.
Financial resilience and trust
People are described as having low financial resilience if they are over-indebted or have little capacity to withstand financial shock.
For example, those who could not cope with a £50 cut to their monthly income or with losing their main source of household income for a week.
Even before Covid-19, 20 per cent of adults or 10.7 million people had low financial resilience.
The FCA has highlighted the recommendation for people to have at least three months of expenses set aside as an emergency fund.
Firms should pay attention to this and make they review and document that the appropriate amount for their client has been set aside.
In February 2020 42 per cent of adults said they had confidence in the financial services industry, and 35 per cent of respondents believed financial firms to be honest and transparent.
People's financial experiences of Covid
As mentioned, the FCA data suggests that between March and October 2020, the number of adults with characteristics of vulnerability increased by 3.7m to 27.7m people.
As you might expect, the rise has been driven by more people experiencing negative life events, particularly redundancy or reduced working hours. This is up from 20 per cent of adults in February last year to 29 per cent in October.
Low financial resilience is also up over the same period from 20 per cent of adults to 27 per cent.
In October, 18 per cent of respondents said they had a mental health condition, up from 12 per cent in February. Of those with a mental health condition, 43 per cent were aged between 18 and 34.
Among the self-employed, only 4 per cent expected to cease trading. A further 26 per cent expected their revenues to fall slightly, with 16 per cent expecting their revenues to fall significantly. Some 13 per cent of adults feel they'll need debt advice in the next six months, while a total of 1.4 million adults said they had paid out money to a possible Covid-19 scam.
The implications for advice
It's clear that in highlighting these figures, the FCA continues to expect advice firms to be mindful of vulnerability when they deal with clients, both existing and new.
It's worth making sure senior managers consider the following questions:
- Are all practice staff aware of the firm’s internal vulnerable client policies and the existing processes in place?
- Is the firm monitoring any increases in the number and types of vulnerability being dealt with?
- Does the firm robustly assess how effective their vulnerable client policy is in line with recent experiences?
- Are new experiences of dealing with vulnerable clients being discussed among staff to highlight and promote best practice?
- Is the firm satisfied that, at the early initial client engagement stage, clients who show signs of vulnerability are being identified and a bespoke plan to deal with them can be put in place?
- For existing clients, perhaps when carrying out a suitability assessment as part of ongoing advice, who wouldn't have been considered vulnerable before but now falls into this category because of Covid-19?
- Does the client file evidence the steps taken to identify and dismiss or confirm vulnerability?
- Does the file evidence the steps taken when applying the vulnerable client policy?
- Does the current policy need to change? For example, if a firm has decided a vulnerable client should be accompanied by a trusted third party, is this the case when advice is being given remotely?
- When dealing with over-indebted clients, does the policy take into account the various government support schemes?
- When dealing with recently bereaved clients or those suffering from physical or mental health issues, does the current policy need to allow more time for clients to consider the longer-term effects of their financial decisions given the new post-lockdown environment?
- Are current spending patterns realistic in the medium to longer term as social distancing and travel restrictions are lifted? Are they realistic in the event of a return to the office, and a return to pre-Covid spending?