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Consumer sentiment survey paints a picture of vulnerability

Deloitte’s recent interactive Global State of the Consumer Tracker, released yesterday, reports that South Africa was unique in comparison with its peers in that consumers were more anxious about finances than about the pandemic.

Business Day also reports that South African consumers are more concerned about their financial situation than about Covid-19, with an expert describing the country’s pandemic effect as shifting from a health crisis to a financial one. “About 41% of SA consumers were spending more than their income allowed each month. In another indication of how vulnerable consumers were, 80% reported delaying buying cars. The major reason was that their financial situations had changed.”

These results are in line with the Momentum Unisa Consumer Financial Vulnerability Index (CFVI). “A review of the average annual scores of the CFVI and its sub-components shows that consumers suffered greatly during 2020. The average annual score indicates that consumer financial vulnerability was at its lowest level since inception of the index, dropping to a low of 43.4 points. The main contributor to the low score was a significant increase in debt servicing vulnerability. This sub-index declined from 48.7 points in 2019 to 40.9 points in 2020, on the brink of the very vulnerable category of the index scale. This means that the inability to service debt made the largest contribution to consumers’ financial vulnerability,” according to the Q4 2020 results.

Vulnerability identified as key challenge

The financial services industry is experiencing dramatic transformation, challenging both regulators and financial services firms to keep pace. KPMG identified the vulnerability of the customer or consumer as one of the ten key regulatory challenges for 2021 and help answer the question: “What are the steps I can take now to prepare? “The disruptions that faced all industries in 2020 will forever reshape the financial services industry,” according to Michelle Dubois, Senior Manager, Regulatory Centre of Excellence at KPMG.

Dubois points out the following driving factors:

  • The number of customers identifying as vulnerable is increasing due to tough economic times and the impact of the COVID 19 pandemic
  • There is increased regulatory scrutiny combined with public pressure on financial services firms to do the right thing, even when no one is watching
  • Looking after vulnerable customers is not just a compliance exercise, it’s a business imperative

According to Dubois the term vulnerable customer was first defined by the UK Financial Conduct Authority (“FCA”) in 2015, 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.”  In order to understand the term and concept of vulnerability Dubois highlights two elements: the first being the customers personal circumstances that may result in them being prone to a greater degree of harm than the average customer; and the second the onus that is placed on the financial institution to treat the vulnerable customer fairly and with due consideration of their circumstances.

“Defining vulnerable customers is a fluid concept, particularly at a time where this category of customer has expanded dramatically as a result of not only the COVID pandemic, but also as a result of globally constrained economic circumstances.” Dubois raises a question though: “To what lengths should a financial services firm go to ensure that vulnerable customers are identified, protected and ultimately treated fairly?”

Does the answer lie in regulation?

Dubois remind us of the second draft of the Conduct of Financial Institutions Bill. The Bill makes it clear that when providing financial products and financial services a financial institution must ensure that the products and services are

(a) appropriate for targeted or impacted financial customers;

(b) provided in a manner that is as objective as possible; and

(c) provided in a manner that supports the delivery of appropriate financial products and financial instruments to those financial customers.

The Bill goes further to say that a financial institution must ensure that its financial customers are provided with financial products and financial services, as the case may be, that perform as that institution has led its financial customers to expect, through the information, representations and advertising provided by or on behalf of the institution to those financial customers. Although not expressly mentioning the vulnerable customer it is clear that the regulator would like to see a more defined move away from a product centric approach to one that puts the customer’s needs first.

The proof is in the pudding

Dubois mentions that the COVID pandemic has provided an example of just how critical it is to ensure that products remain relevant. “Business interruption cover gave many clients a false sense of security (rightly or wrongly), believing that in the event of interruption to their business they would be covered. No one could have reasonably envisioned the extent of the current pandemic and not all business interruption policies included circumstances such as these in their contracts, leading to disillusioned customers and a social media frenzy. Ultimately, in order to treat customers fairly under the circumstances, we have to ask the uncomfortable question: are we prejudicing vulnerable customers by strictly relying on the legal provisions in their contracts?”

Another critical component of ensuring appropriate outcomes for customers, is making sure that customers, especially those who are vulnerable, receive ongoing product communication. ”I have to wonder how many customers who were retrenched as a result of the pandemic relied on, or knew to rely on, their credit life insurance to meet their mortgage payments? Were they aware that this was an option that was available to them? When they signed for their home loan, did they understand that this cover was included in the package?”

“Put the customer at the heart of everything you do and the product will sell itself.”

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