Over the past year, the Irish financial services landscape has evolved dramatically. The impact of elevated inflation, interest rates and cost of living pressures has led to an increase in the number of customers falling into the category of ‘vulnerable’. Recent publications from the Central Bank of Ireland have highlighted the importance for firms’ culture, policies, and frameworks to support customers in vulnerable circumstances.
This article explores the dynamic nature of vulnerability, highlighting the key drivers of financial instability and the requirement for firms to have an agile framework to support vulnerable customers.
Discover how KPMG, armed with its extensive industry knowledge, can assist firms in navigating the evolving risk landscape and enhancing their vulnerable customer frameworks.
Drivers of financial instability
Inflation
Global inflation has experienced a slight decrease in 2023. This decrease has not had a material impact on consumers as the inflationary pressure remains prevalent in everyday life posing risks to consumers. Domestically businesses who had difficulty during the pandemic are showing signs of vulnerability through modest increases in early arrears on loans and in the insolvency rate.
Interest Rates
A prolonged period of high interest rates has escalated financial instability globally and put pressure on consumers’ repayment capacity. Domestically, on foot of increased interest rates, early indicators of repayment challenges are apparent for mortgage holders, particularly those with previous repayment challenges. According to the CBI’s November 2023 Financial Stability Review, the share of tracker mortgages beginning to miss more than one payment over a six-month period has increased from 0.4 percent in the first half of 2022 to 1.0 percent in the first half of 2023.
Vulnerability
In recent publications the CBI has emphasised the importance for firms’ culture, policies and frameworks to support customers who require additional support (vulnerable customers).
Vulnerable customer categories include those suffering from physical disability, physical / mental health difficulties, cognitive disorders, lower financial capabilities, those at risk of financial abuse or as a result of a life event e.g. bereavement. Now more than ever is the time for financial services companies to focus their efforts on identifying and assisting vulnerable customers.
Customers in vulnerable circumstances face a higher risk of experiencing excessive debt, falling victim to scams and entering arrears. In order for firms to act in the best interest of consumers, they should ensure they have a comprehensive understanding of their consumers and what makes them vulnerable. The CBI has stated that vulnerability can be described as a spectrum of risk rather than a static state with consumers moving in and out of different areas of vulnerability. This requires firms to adopt a dynamic vulnerability framework to sufficiently cater to their consumers’ needs.
In order to appropriately incorporate vulnerable customers into firms’ culture and policies, the CBI notes that firms should act in the best interests of customers, as well as providing sufficient and transparent information to customers throughout the customer lifecycle. This approach ensures that specific customer circumstances are considered in future interactions with them.
KPMG’s Vulnerable Customer Framework
Firms should evaluate their definition of vulnerable customers to assess if it is robust enough to meet CBI expectations. With vulnerabilities not always apparent, firms should equip all employees with sufficient training to enable them to identify a potentially vulnerable customer. Behavioural analysis and monitoring need to be undertaken to assess the potential vulnerability and establish a bespoke course of action. KPMG’s Vulnerable Customer Framework provides a comprehensive and dynamic approach to identify, engage with and support vulnerable customers.
Strategy and Policy:
- Is there a detailed and embedded vulnerable customer policy in place?
- Is the vulnerable customer strategy and policy assessed and evaluated on a regular basis?
- Does vulnerability form part of your product / service design?
- Are risk and control assessments (“RCAs”) undertaken regularly to identify potential risks for vulnerable customers and are control gaps identified and addressed?
Recording Vulnerability:
- Does your data show which products / processes impact vulnerable customers?
- Are management information (“MI”) metrics aligned to your RCA and risk scores?
- Is the MI provided to Senior Management to show a holistic customer view to allow them to assess the overall impact of the vulnerability strategy and to take proactive steps where necessary?
Management Information:
- Does your data show which products / processes impact vulnerable customers?
- Are management information (“MI”) metrics aligned to your RCA and risk scores?
- Is the MI provided to Senior Management to show a holistic customer view to allow them to assess the overall impact of the vulnerability strategy and to take prolactive steps where necessary?
Handling Vulnerable Customers:
- Is there a clear point of contact for vulnerable customers with a support team in place to provide guidance or advice? Are communications tailored to vulnerable customers?
- Is the information conveyed in a clear and concise manner to account for customers who have not disclosed their vulnerability?
Training:
- Are staff routinely trained on the vulnerable customer policy and strategy?
- Does the training include how to identify a vulnerable customer even when it is not disclosed?
- Do staff view vulnerability as an ever changing spectrum that requires regular monitoring?
Digitalisation:
- How is your firm supporting consumers who are digitally disadvantaged?
- Is the information on your website clear enough for all customers to understand?
- Are customers made aware of online fraud and scams and does your firm have a treatment strategy in place if it occurs?
How can KPMG help?
KPMG provides risk and regulatory advice, proposition design, operational risk and control optimisation services across the financial services sector. We have a clear understanding of industry standards for consumer protection, rooted in our first-hand experience of working alongside industry peers and regulators on such matters over the last 15 years. We can help ensure you have an appropriate Vulnerable Customer Framework in place so that you are both identifying vulnerable customers and ensuring good customer outcomes once identified.
Examples of where KPMG can assist include:
- We can identify a suitable owner for your vulnerability programme including the design of an appropriate governance framework;
- We can develop end-to-end customer journey mapping, identifying vulnerable customer touchpoints and designing appropriate controls to reduce the risk of customers receiving poor outcomes;
- We can review your risk assessment framework and the impact it has on your customer base;
- We can develop a customer treatment policy for all categories of vulnerability; and
- We can design a reporting framework with quantitative and qualitative MI, to demonstrate trends as well as the characteristics of vulnerability and potential vulnerability.
