Advising vulnerable clients: red flags and best practice

Financial advisers need to be alert to signs of vulnerability in their clients. From a risk perspective, financial advisers will want to ensure their client has the capacity to give instructions. 

However, the duty to be on the lookout for vulnerability goes beyond that. Protecting vulnerable customers is a key focus of the Financial Conduct Authority (FCA), which has issued detailed guidance on the treatment of vulnerable customers (FG21/1) and its expectations of firms. 

In addition, the new Consumer Duty which applies from 31 July 2023 makes explicit reference to the need for firms to provide additional care to ensure they meet the needs of vulnerable customers.

Meaning of “vulnerable” customer

The FCA has defined a vulnerable customer as "someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care."

The FCA's 2020 Financial Lives Survey found that 46 per cent of UK adults, equivalent to 24 million people, showed one or more characteristics of vulnerability.

Drivers and warning signs

There is no exhaustive list of "vulnerability warning signs" to look out for as there are many ways in which a client can be vulnerable. However key drivers of vulnerability include:

• Health: health conditions or illnesses, a client could have mental health issues, or suffer from poor physical health.
• Life events: including bereavement, relationship breakdown, new caring responsibilities.
• Resilience: low ability to cope with financial or emotional shocks.
• Low capability: such as poor literacy, numeracy or digital skills, that makes them more vulnerable than they might otherwise be.

Financial advisers who often have long term relationships with clients and who will be asking questions about their clients personal and financial circumstances as part of their suitability assessment need to be alert to these drivers of vulnerability.  

In addition, there are some general patterns that are typically "warning signs" that a client is in a vulnerable position. It is important to bear these in mind on an ongoing basis.

1. Dramatic departure from previously stated (and often long-standing) intentions, particularly when new instructions come about abruptly and without explanation.
2. Making decisions that would lead to a negative outcome, as this may indicate that they are in a position of vulnerability – either due to health issues impairing their cognitive function or due to undue influence from third parties.
3. Rambling or incoherent instructions, particularly if they seem incapable of giving clear instructions even after attempts at clarification.
4. Heightened and erratic emotions which are incongruent with the situation or the client’s usual disposition.
5. Instructions being given through a third party, particularly if the client is not copied into emails or if the third party is resistant to allowing the client to attend calls or meetings with the advisers directly.

When to intervene?

Advisers will normally have a vulnerable customer policy and procedure which they should refer to. The FCA guidance includes various case studies setting out examples of good and poor practice. Further consideration of the FCA guidance is beyond the scope of this article but we set out some more generic comments below. 

The legal test for capacity set out in the Mental Capacity Act 2005 (MCA) is a two-stage test – whether the person has an impairment or disturbance in the functioning of their mind, and whether this impairment makes them unable to make a decision for themselves. The default assumption is that someone has capacity, unless the converse can be established.

However, as we note above, the test for vulnerability is much broader. Advisers can struggle to know when or how to intervene in a situation where a client’s capacity is uncertain or the client is otherwise showing signs of vulnerability.  

Having identified one or more drivers or warning signs, advisers should carry out further investigations into the client’s vulnerability. If the driver is health related, best practice would be to suggest a capacity assessment with a medical professional. Advisers can also speak to close friends or family members, but will need to do so in a manner that is compliant with their duties of confidentiality.

Another and perhaps better option may be for financial advisers to build up good relationships with the client’s other advisers, who will be under similar duties to ensure they are protected. It is important to see the client’s advisory team in a holistic manner.

Issues of confidentiality may also be less of a concern if these relationships are developed at an early stage and clients can consent to allowing certain types of communication to take place between advisers.

A shifting landscape

The responsibility for identifying and protecting vulnerable individuals is shifting in two key ways.

First, the duty to be alert to risk drivers and to identify vulnerabilities lies now with a broader range of practitioners and the expectations on financial advisers and how they treat vulnerable clients has significantly increased over recent years.

Second, the range of situations in which a client is seen as vulnerable is considerably wider than used to be the case. Advisers can no longer rely solely on the legal test for capacity. Rather, advisers need to be aware of the range of vulnerabilities a client may be subject to, and take a holistic approach. It is a higher burden, but it is one that advisers are well-placed to bear, and when it comes to ensuring that vulnerable clients are appropriately protected, it is a step in the right direction.

If you require further information about anything covered in this briefing, please contact Charlotte Fraser, Alicia Tan or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law as at the date of publication. It should not replace legal advice tailored to your specific circumstances.

Please note this content was originally published by eprivateclient see here.

© Farrer & Co LLP, March 2023