Redefining Customer Vulnerability: A Comprehensive Approach to Meet FCA’s Consumer Duty
Banks, Insurers, Investment companies and Asset Management firms have been challenged to better understand and provide more positive outcomes to their customers and clients.
The FCA have clearly stated the change they want to see in Financial Organisations “We want to drive improvements in the way firms treat vulnerable consumers and bring about a practical shift in firms’ actions and behaviour”.
This requires financial brands and organisations to better understand the needs of their audiences and from those insights action positive interventions that improve their customer experience. This necessitates a shift from their assumed rationale about customer behaviours and decisions to a more evidenced and predictive audience CX strategy.
We have been supporting organisations within the FS sector gather more accurate data about the issues, needs, problems, weaknesses of their consumers and how these impact positive financial decisions. Then working with them to demonstrate how we use these insights to meet the new FCA customer duty requirements.
Even how organisations define a problem seriously impacts their ability to respond and address issues surrounding it.
Let us use the concept of ‘customer vulnerability’ as an example of how we might add value to an organisations response to the FCA’s call to action.
What We've Learned About Customer Vulnerability
What has been evident from our work helping financial organisation, is that there has been a tendency for firms to exact a very bias definition of ‘vulnerable customer’. Often citing customers who are financially challenged, socially disconnected or having mental health issues as being the core ‘vulnerable’ audience the FCA wants addressed.
Those who are slightly more advanced in their understanding are having us develop and facilitate training workshops around cognitive biases that impact financial decisions and planning.
While this is encouraging, the narrow definition of ‘vulnerable’ has meant many brands are at risk of not complying with the FCA’s remit by failing to recognise another audience segment that is equally vulnerable to poor financial decisions.
The Overlooked Segment: Overconfident Customers
These are the ‘overconfident’ customers and clients who either wrongly believe they are more financially educated and able than they actually are or fail to make better decisions as they are impulsive and rash. Overconfidence bias is a type of cognitive fault that causes us to think we are better, more skilled or experienced in some areas than we really are.
There is growing scientific evidence that there is a considerable proportion of ‘overconfidence' consumers and investors and that these traits often lead to poor outcomes and negative financial experiences.
Research has suggested that investors who are overconfident, may not seek financial advice from either experts, friends or family that might serve to mitigate any negative outcome. We know from psychological science that overconfidence also tends to generate impulsive and risk tolerant behaviour, as well as optimism bias (where we feel everything will work out).
This also creates an added problem in terms of how we frame or position our products and services. Given many financial services and products are presented in visual ways to try and enhance reader understanding - this in itself can actually lead to more negative outcomes for overconfident customer. It has been demonstrated that overconfidence even impacts consumers ability to understand and interpret financial spreadsheets accurately. Graphs and other visualizations have also been demonstrated to influence investor decision-making especially in overconfident individuals.
Psychological Interventions: Reducing Overconfidence
We do know that from a psychological perspective we can try and counter some of these overconfidence tendencies to help customers make less risky decisions and more positive outcomes.
For example, there is research to support the notion that investors who jointly decide temper their overconfidence tendency. That, family or friend inclined interactions are more effective in reducing overconfidence than solely relying on a financial advisor. Friends and family are able to offer conversations based on the wider context often raising or highlighting family or social unknowns that the financial adviser would not be aware of.
It has been demonstrated that the process of highlighting unknowns can have a more pronounced impact on financial overconfidence than consulting a professional advisor.
The most effective model would be to consult both of course - the adviser has financial experience and knowledge and friends and family can act to raise context issues.
In Summary
So in essence if we are to respond the the FCA’s call to action against customer vulnerability, organisations need to understand and respond to both these ‘vulnerable’ populations - those that lack the confidence, knowledge and skill and those that are too confident.
We continue to help clients unpick and resolve their customer and client strategy. If you would like to find out more then please do get in contact with us.