Culture change towards vulnerable customers is here to stay

Running into the festive season, it’s a sobering thought that the real financial pain from the Covid-19 lockdown may just be biting for many households.

According to a survey conducted by the FCA in October, the number of UK adults rating their financial resilience as ‘low’ has increased by two million since the beginning of the pandemic, to now reach 12 million.

An earlier poll of 1,000 consumers, carried out in March 2020 by Consumer Intelligence and consultancy Sicsic Advisory, found the proportion of consumers admitting that they fit the FCA’s definition of vulnerability had doubled from 13% to 26% between 2019 and 2020.

The report said that many of these customers have been pushed into vulnerability for the first time as a result of the pandemic.

Many households have exhausted the strategies they employed to manage costs early on in the crisis, when the prime minister was predicting that the virus could be “sent packing” in 12 weeks, according to recently published research by the thinktank Resolution Foundation.

These strategies included dipping into savings and cutting back on other costs.

But financial hardship has been masked in many instances by measures like the government’s furlough scheme.

“We are at an inflection point where people have taken this as far as they can go and there are real pinch points coming,” said Ian Hughes, chief executive of Consumer Intelligence.

“Until very recently, people weren’t as financially squeezed as they might have been and had not been forced to make those big decisions, but that is still to come.”

New approach

As England geared up for lockdown two at the beginning of November, the FCA published its new guidance for how insurance and premium finance firms should treat customers hit by the economic after-shocks of the coronavirus pandemic.

The main change from the FCA’s previous guidance, issued in August, is that companies will no longer be expected to contact all customers who have missed payments.

Instead, firms should consider whether it would be ”necessary or appropriate” to contact a customer to offer support if the latter has missed payments during the pandemic, even if they have not contacted the firm.

The new requirements will only apply to those customers, still likely to be in a minority, who pay for insurance in instalments rather than renewing on an annual basis.

Sue Mallender, senior consultant at Sicsic, believes that the financial pressures resulting from the pandemic is likely to have increased the take up of instalment mechanisms.

“Take up is certainly higher amongst the more financially vulnerable who don’t have a few hundred pounds knocking around,” she said.

The guidance on making contact isn’t a “fundamental shift”, but a “more tailored” approach to potentially vulnerable customers, she continued.

“It’s being more proactive about making contacts with customers. Now they’ve had experience of running with this for a while, they’ve seen the impact that it’s had on their customer base and will be able to tailor things more appropriately to their customers’ needs.”

Gareth Shaw, head of money at Which?, said the guidance is a “positive step” but the regulator has not gone far enough to ensure that those in financial difficulty are being given the support they may require.

He explained: “It’s very concerning that the regulator is no longer requiring insurers to proactively contact those who miss a payment.

”Customers missing payments are likely to be vulnerable and firms should be doing everything they can to engage with and support those who need it most.

“The removal of this requirement for insurers is inconsistent with the expectations on providers of credit cards and mortgages. Such variations across sectors risks a consumer with multiple products being treated very differently.”

Jonathan Cavill, senior associate at Pinsent Masons, understands why the regulator has eased its requirements on firms to contact every customer in potential financial trouble.

”There’s always an element of appropriateness that needs to be considered: extremely draconian regulatory requirements may not be appropriate and proportionate,” he said.

“The FCA is mindful of that and has a good sense of what is practically achievable and balancing that against what needs to be done to achieve its customer protection objective.”

Level playing field

Firms should not, states the guidance, cancel insurance policies solely due to non-payment without first considering actions to support customers who may be in financial distress due to coronavirus.

These could include reassessing the customer’s risk profile or revising the cover by considering whether the firm has other products better suited to customers’ post-pandemic needs.

The example offered by the FCA is motor insurance customers, who may no longer use their vehicle at all or for business purposes. In such circumstances, they could be offered materially lower premiums or might no longer need associated add-on cover, such as legal expenses insurance.

Where forbearance is required and customers must cancel their policy, firms should waive any cancellation fees in order to ensure it is treating its customers fairly.

The FCA should not be viewed as “weak” for taking this proportionate response, said Cavill.

“To create a level playing field you may need to provide more assistance to those who are vulnerable. Don’t just cancel policies, but think about what other actions you may take to support the customer.”

This kind of flexibility will often suit the new circumstances created by the mass shift to working from home, which looks unlikely to be a pandemic-era fad.

Hughes said: “[Customers] have been thinking about saving money on home insurance simply because they are spending more time at home so are not seeing the level of risk that they did before. The sense of vulnerability has changed dramatically: that means the way insurers are responding to that has also had to change.”

This trend can additionally be seen in what Hughes described as the recent “double digit” growth in usage based insurance. He continued: “It’s not [a] case of cancelling insurance, but beginning to look for policies that reflect their new driving habits and patterns.”

As well as benefitting vulnerable customers, moves like motor specialist Admirals’s cash back to customers during lockdown when driving was difficult can also boost loyalty, Hughes pointed out

The changes in culture and approach towards vulnerable customers will be lasting, added Cavill. 

“Many of the improvements firms are putting in place will be here to stay. Once you demonstrate the appropriate cultures and mindsets, you can’t turn the clock back and stop doing it just because Covid has gone away.”