The FSCA has set out its approach to embedding “consumer vulnerability” considerations in the regulatory and supervisory environment.
The Authority’s Statement on Consumer Vulnerability, published yesterday, outlines the envisaged implementation timeline. The first phase, which starts this year, includes engaging with stakeholders on the Vulnerability Statement.
Consumer vulnerability refers to the condition or state in which individual consumers or groups of consumers are at increased risk of experiencing negative outcomes or harm within the financial sector because of various factors. These factors may include personal circumstances, economic conditions, or external events that impact their ability to make informed financial decisions, access suitable financial products and services, or meet their financial obligations.
According to the Vulnerability Statement, a combination of economic, social, and environmental factors makes consumers in South Africa vulnerable to financial hardships and impacts their ability to cope with adverse events. These factors include:
- Events such as the Covid-19 pandemic, the unrest in July 2021, and natural disasters, which have significantly affected consumers by causing loss of income, unexpected expenses, and damage to infrastructure.
- The cost-of-living crisis, where the rising cost of everyday essentials such as energy and food outpace average household incomes. This crisis is exacerbated by global factors such as the Russian invasion of Ukraine and increased climate shocks.
- High unemployment, with many individuals struggling to make ends meet and cope with unexpected expenses. Financial stress is prevalent among South Africans, with a significant portion feeling anxious about their finances.
- Poverty, unemployment, and inequality, which are a barrier to inclusive and equal economic development in South Africa. These factors contribute to lower levels of financial resilience among consumers.
Why consumer vulnerability should matter to financial institutions
The Statement says consumer vulnerability should be a concern to financial institutions because it impacts fair treatment obligations, financial stability, customer trust, regulatory compliance, and financial inclusion efforts.
- Fair treatment: Financial institutions have a responsibility to treat all customers fairly, regardless of their circumstances. Vulnerable customers may be more susceptible to poor outcomes because of factors such as unsuitable financial products, unfair sales practices, or difficulty accessing services. Failing to address vulnerability could lead to unfair treatment and potential harm to these customers.
- Financial stability: Vulnerable customers who experience financial shocks, such as unexpected expenses or loss of income, may struggle to meet their financial obligations. This could lead to defaults on loans or other financial products, impacting the financial stability of both the customers and the institutions serving them.
- Customer trust: Demonstrating a commitment to identifying and addressing customer vulnerability can enhance trust in financial institutions. Conversely, failure to do so may lead to reputational damage if customers perceive institutions as neglecting their needs or exploiting their vulnerabilities.
- Regulatory compliance: Many jurisdictions have regulations requiring financial institutions to consider customer vulnerability and ensure fair treatment. Non-compliance with these regulations can result in penalties, legal action, and damage to the institution’s reputation.
- Financial inclusion: Understanding and addressing customer vulnerability is essential for promoting financial inclusion. Failing to serve vulnerable customers effectively can perpetuate inequality and deepen financial exclusion, which ultimately harms both individuals and the broader economy.
Relationship between vulnerability and TCF
The Statement says consumer vulnerability and Treating Customers Fairly (TCF) are intertwined. TCF is a fundamental principle that guides financial institutions in ensuring the fair treatment of their customers. Consumer vulnerability directly influences the application and effectiveness of the TCF principles in several ways:
- Recognizing and understanding consumer vulnerability is essential for financial institutions to effectively apply TCF principles. Vulnerable customers may face unique challenges or require special considerations to ensure fair treatment. Therefore, institutions must be able to identify vulnerable customers and understand their specific needs and circumstances.
- Vulnerable customers are more susceptible to experiencing unfair treatment, such as being sold unsuitable products or facing difficulties in accessing services. TCF requires institutions to mitigate these risks by ensuring that their products and services are suitable, transparent, and accessible to all customers, including those who are vulnerable.
- The management of consumer vulnerability can serve as an indicator of the extent to which TCF is embedded in the corporate culture of financial institutions. Institutions that prioritise addressing vulnerability demonstrate a commitment to TCF principles and prioritise fair treatment of all customers.
- TCF necessitates that financial products and services meet the evolving needs of customers. Institutions should continuously assess products in line with customer circumstances and emerging risks, including vulnerabilities. This may involve tailoring products or making amendments to better serve vulnerable customers, even on a temporary basis.
- TCF emphasises the importance of providing customers with clear information, support, and guidance to make informed financial decisions. Vulnerable customers may require tailored advice, face-to-face contact, or additional support to safeguard their financial well-being. Financial institutions must ensure that all customers, including vulnerable ones, are adequately supported and informed.
Three-dimensional approach
The Statement reviews the approach to consumer vulnerability by the regulatory authorities in the United Kingdom, New Zealand, the European Union, and by the Central Bank of Ireland, and draws common themes from them.
Following international practice, the Statement says the FSCA may consider vulnerability in terms of the following three dimensions:
- Demographics
The demographic dimension focuses on personal characteristics’ that could contribute to customer vulnerability. It includes indicators such as age, source of income, level of education, digital and financial literacy and capability, health, and geographic location.
This dimension is particularly relevant in South Africa, where 49.2% of the adult population lives below the upper bound poverty line (Statistics SA, 2020). This indicates that a sizeable proportion of the population may be at increased risk of experiencing harm when accessing financial services, due to their low-income levels and limited financial resources.
- Resilience
The resilience dimension of customer vulnerability refers to an individual’s ability to cope with financial shocks or setbacks, such as job loss, illness, or unexpected expenses. Resilience can be influenced by factors such as income, savings, social support, and access to credit.
According to the Organisation for Economic Co-operation and Development (OECD), new evidence on the distribution of wealth shows that in OECD countries many people, who are not considered income poor, are still economically vulnerable in the event of a sudden loss of income through unemployment, family breakdown, or disability.
- Life circumstances
The life circumstances dimension places emphasis on the impact of major life events on an individual’s financial well-being. These life events include health threats, loss of income, bereavement, and breakdowns of relationships.
Three-phase implementation
The FSCA plans to embed consumer vulnerability in its approach to regulation in three phases over the next three years. The Statement says all three phases should be underpinned by targeted consumer education.
Phase 1: Engage stakeholders (2024 to 2025)
The FSCA will consult stakeholders, including the financial sector and consumers, to understand current practices regarding consumer vulnerability. It will obtain feedback on the Authority’s plan to embed vulnerability within the TCF framework and sensitise supervised entities on the importance of considering vulnerability throughout the product lifecycle.
The aim of Phase 1 is to identify gaps in the market and regulatory approaches, along with insights to refine the FSCA’s approach to consumer vulnerability.
Phase 2: Analysis and embedding of vulnerability approach (2025 to 2027)
The FSCA will refine the definitions of vulnerability based on feedback from Phase 1 and develop its expectations of financial institutions regarding vulnerability. The Authority will consider embedding vulnerability within the TCF supervisory approach and issue guidance and Conduct Standards.
In Phases 1 and 2, the FSCA will explore developing a multi-dimensional Consumer Vulnerability Index (CVI), which could evaluate the incidence and intensity of financial consumer vulnerability.
The CVI will measure the extent to which the financial sector is delivering positive consumer outcomes and experiences, and how they may be changing over time.
Phase 3: Review of interventions (2027)
The FSCA will evaluate its regulatory and supervisory interventions to assess whether they have been effective in delivering positive customer outcomes. Insights gained from the review will inform future interventions and ensure alignment with customer needs and objectives.
