Customer loyalty is of paramount importance for a financial insitution’s survival. Many forget that understanding a consumer’s financial situation is an underrated way of ensuring this loyalty. As the links between mental health and financial instability become more pronounced, financial institutions must do more.
In paying more attention to a customer’s financial situation and mental health, an organisation can give them special treatment. Instead of chasing them up for money they don’t have, causing more problems for the consumer, organisations can think of innovative alternative solutions.
Helen Lord is the CEO of the Vulnerability Registration Service. The company is a not-for-profit providing a central vulnerability database that helps inform financial services, utility, debt collection and other organisations of a person’s vulnerable circumstances. These include financial abuse, risk of fraud, over-indebtedness and power of attorney.
Speaking to The Fintech Times, Lord analyses how debt and mental health issues are pushing more people off the cliff, and how the financial sector can and must do more to catch them:
Finance and mental health
The current cost-of-living crisis is driving household debt to new heights. There are many adults now struggling to cope with their finances (19 per cent in the last 12 months). This is in addition to a rising number facing significant barriers to keeping on top of their payments (16 per cent). The picture among those who were already in vulnerable circumstances, however, is far worse (30 per cent and 27 per cent).
Closely linked to this rising level of debt is the impact on mental health. Nearly one in four UK adults (23 per cent) have admitted to experiencing mental health struggles in the last 12 months. Among those that were already vulnerable, this is 46 per cent.
It is recognised that mental illness and debt often go hand in hand, as mental illness can greatly impact a person’s ability to make decisions, communicate with service providers and manage financial matters. As such, many of these people have fallen into debt and some have fallen into more vulnerable circumstances. And it is extremely difficult for anyone to recover from a mental illness when they are facing problem debt.
Vulnerability is not just about debt, but debt can play a key role
Vulnerability can take many forms – mental or physical health conditions that affect day-to-day tasks. Examples include life events such as bereavement, lack of resilience which makes it difficult to cope with financial or emotional shocks. This in addition to the capability which refers to a person’s knowledge of financial matters or low confidence in managing money, or poor language or literacy skills.
It can be ongoing or it can be transient. What is true across all cases is that it impacts the person’s ability to handle their affairs adequately. This is why the issue of protecting those who are vulnerable, or have fallen into vulnerable circumstances temporarily, from further harm has been high on the FCA’s radar since 2017. The ‘Dear CEO’ letter earlier this year and the Consumer Duty rules, announced this summer, both aim to reinforce this drive with clear emphasis on organisations taking reasonable steps to avoid foreseeable harm.
Still failing their customers
Despite all this noise, however, our research has revealed that 18 per cent of vulnerable people have still been chased for missed payments or debt collection in the past year. 10 per cent have been evicted, are subject to a repossession or have been put at risk of homelessness. One in four (26 per cent) vulnerable adults have experienced further mental distress after being chasing for missed payments or debt they simply can’t pay.
A significant concern raised by the research is that in the last 12 months, vulnerable people (those least likely to be able to manage their finances and most likely to already be in extreme levels of debt) have been pushed towards higher cost borrowing – 12 per cent of vulnerable people, compared to six per cent of the general population. For others, overwhelmed and unable to cope, they are turning to illegal lenders. Two per cent of the total population borrowed from loan sharks last year: four per cent amongst the vulnerable.
This is not protecting vulnerable people from further harm. This is causing them further harm.
The challenge for banking and financial services is that people with mental health and debt issues are reluctant to talk to them about their circumstances. Often until it’s too late. 51 per cent of vulnerable people have never told their banking or financial services providers about their vulnerable circumstances.
This indeed makes the task more difficult. The situation is not helped by the fact that despite all the noise around identifying and protecting the vulnerable over the past few years, only 12 per cent of vulnerable individuals were even asked by their banking or financial service providers if they were vulnerable or in vulnerable circumstances.
Starting with those who want to be found
Protecting vulnerable customers from further harm, and other customers from falling into vulnerable circumstances, is one of the biggest challenges that banks and financial services will face this year.
There have been pockets of progress. But far too many vulnerable people are still being missed and inadvertently caused more harm. They are still being offered finance they can’t afford and still being chased for debt they can’t pay. These unguarded actions are not just coming from the banking and financial services sector, but from all organisations that provide a service, and they are pushing these people over the edge.
With the new Consumer Duty rules, banking and financial services will have to prove they’ve taken clear and proactive steps to identify, understand, assess and engage with their customers at every single stage of the customer relationship. Or they will face significant fines, not to mention damage to reputation. The challenge of course is doing all of this, without draining resources and impacting their daily operations.
There are simple, but powerful, first steps that organisations can take. This will enable them to understand who in their customer base is struggling with vulnerability. Asking customers about their circumstances at each point of contact is the simplest thing organisations can do. We know that 54 per cent would tell their service providers if they were merely asked.
Beyond this, services like the Vulnerability Registration Service hold a wealth of information. They provide a clear indication of who is vulnerable right now. In addition to providing clear evidence of due diligence, this would immediately alert organisations to the fact that there is a need for more appropriate action.
The current cost-of-living crisis demands that focus is on what can be done right now to ensure circumstances are not made worse for those who are already in distress.