Strategi Group has outlined a number of issues with which it says advisers need to be prepared for when working with potentially vulnerable clients.
According to the compliance firm’s MD, David Greenslade, worries over COVID-19, job-loss stress, reduced household income, and concern for family members, may cause some people to feel vulnerable and make poor financial decisions.
The Financial Markets Conduct Act 2013 includes statutory duties for people who give regulated financial advice, including complying with the standards of ethical behaviour, conduct, and client care.
Greenslade says the FMA’s Strategic Risk Outlook for 2019 identified demographic change as likely to increase the number of vulnerable clients, due to an ageing population and an increase in ethnic diversity as a result of immigration (and an increase in non-English speakers).
The Strategi Group’s Guidance Note – Vulnerable People says the impact of COVID-19 on people and the economy may lead to a rise in the number of vulnerable clients, for example, those who have found themselves out of work.
“The Code of Professional Conduct for Financial Advice Services specifically mentions client vulnerabilities,” writes Greenslade
“In addition, the FMA’s Annual Corporate Plan 2019/20 identified treating customers fairly in all interactions as a priority and highlights the need for consumer trust in financial services, markets and products.
“The way you operate your business must have appropriate safeguards in place to handle vulnerable clients fairly.”
Who is a vulnerable client?
The FMA defines a vulnerable client as “…a person, that due to personal circumstances, is especially susceptible to detriment, particularly when the adviser/business is not acting with the appropriate level of care”.
…the person may not consider themselves vulnerable or not know how to disclose they are vulnerable…
Greenslade writes that the personal circumstances that can cause vulnerability can be wide-ranging, but broadly falls under the following categories:
- Communication difficulties (including learning difficulties, dyslexia and English not being their first language)
- Physical or mental disabilities or impairments
- Serious or chronic illness or health issues (including those who are dependent on a carer)
- Have suffered traumatic events (including bereavement, serious illness diagnosis, natural disaster and violent crime)
- Challenging personal circumstances (including financial hardship, redundancy and caring responsibilities); and
- Who are elderly (aged 65 or over)
Greenslade writes that there can be challenges in identifying vulnerable clients.
“For example, the person may not consider themselves vulnerable or not know how to disclose they are vulnerable,” he says. “This is all the more reason to ensure you have robust systems in place to identify vulnerable clients.
“You should also be mindful of the fact that vulnerabilities can be fluid. For example, a client may not be vulnerable when you have initial contact, but circumstances may change throughout your relationship. It is crucial you have appropriate systems in place to identify this and mitigate the risk of failing to meet the client’s needs.”
Training
Greenslade suggests financial advisers and others who interact with clients need to be trained to spot the signs.
“There is not an exhaustive list of vulnerabilities, and similar circumstances may give rise to one person being vulnerable and another person not being vulnerable,” writes Greenslade.
“Therefore, having well-trained employees who can gather information throughout the client relationship is essential.”
…having well-trained employees who can gather information throughout the client relationship is essential…
He says well-drafted documentation that helps collect information on clients’ circumstances and changes to circumstances would be of benefit.
“The fact a client is considered vulnerable – whether they have identified themselves as vulnerable or you have – should be recorded and communicated to relevant employees, usually through a CRM system.
“Having this data enables the advice process to be modified, if necessary, and for the client to be treated with the appropriate level of care.”
Privacy Act
Greenslade says care must be taken to comply with the Privacy Act 1993 and, where applicable, the Health Information Privacy Code 1994 with respect to information about a client’s vulnerable circumstances that may be collected.
“Depending on the size of your business, you may wish to consider having a specialist team that deals with vulnerable clients,” he says.
“If you cannot satisfy yourself that the client has the capacity to understand the product or service they are purchasing, then you should not sell them the product.
“Having systems in place to serve vulnerable clients, not only has a positive outcome for the client but leads to greater levels of staff satisfaction and client retention.”