CPD: Consumer protection – a practical guide to developing a Vulnerable Client Policy

04 Mar 2024

From AdviserVoice - this Regulatory Compliance and Consumer Protection CPD article is proudly brought to you by Russell Investments

Almost every adviser will have at least one vulnerable client so understanding and recognising the red flags are vital.

One of the most significant consumer protection challenges within financial advice – and financial services more broadly – is the protection of vulnerable clients.

Regulators around the world are becoming increasingly concerned about the financial and emotional harm that can occur at the intersection of complex financial products and vulnerable individuals and groups.

In its 2023 -2027 Corporate Plan^[1], ASIC continues to list among its enduring enforcement priorities: “Misconduct involving a high risk of significant consumer harm, particularly conduct that targets financially vulnerable consumers”.

But while issues such as financial abuse – especially of the elderly – are firmly on the radars of most advisers, having received widespread media coverage in recent years, the issue of vulnerability is far more fundamental, and encompasses a much wider spectrum of individuals and situations than may be obvious.

Indeed, for financial advisers, the concept of informed consent – so central to compliant advice – is borne out of the knowledge asymmetry that automatically exists in over 99% of adviser – client relationships. The client, by virtue of their comparative lack of knowledge about increasingly complex financial products and regulations, is immediately at a disadvantage in any advice interaction, and would be vulnerable to that knowledge gap being exploited, were it not for the Advice Code of Ethics and other consumer protection mechanisms put in place by regulators.

Complaints to AFCA involving vulnerable clients soared in the wake of Covid^[2], and with the soaring cost of living crisis leaving even theoretically comfortable clients financially vulnerable, another spike seems likely, as the impact of poor financial decisions are felt more keenly.

In this article, we will consider the broader context of consumer vulnerability within financial advice, examining what we mean by vulnerability, the signs of vulnerability advisers should watch out for, and the steps they can take to develop a vulnerable clients policy, to ensure they are delivering optimal outcomes for their clients, in a caring and compliant way.

What does vulnerability look like?

Following a comprehensive 2016 research program^[3] into vulnerability, The European Commission defined a vulnerable consumer as:

“A consumer, who, as a result of socio-demographic characteristics, behavioural characteristics, personal situation, or market environment:

Is at higher risk of experiencing negative outcomes in the market;
Has limited ability to maximise his/her well-being;
Has difficulty in obtaining or assimilating information;
Is less able to buy, choose or access suitable products; or
Is more susceptible to certain marketing practices.”

ASIC, in their 2019-2023 Corporate Plan^[4], noted that “Any individual consumer can experience vulnerability as a result of any number of factors, including:

the actions of the market or individual providers (e.g. being targeted by products that are inappropriate for a particular consumer, or being given inadequate or overly complex documentation)
experiencing specific life events or temporary difficulties (e.g. an accident or sudden illness, a relationship breakdown, family violence, job loss, having a baby, or the death of a family member)
personal or social characteristics that can affect a person’s ability to manage financial interactions (e.g. speaking a language other than English, having different cultural assumptions or attitudes about money, or experiencing cognitive or behavioural impairments due to intellectual disability, mental illness, chronic health problems or age).

While there is no legal definition of a vulnerable consumer, it is clear that vulnerability can be either enduring, or a point in time condition. Furthermore, it is clear that almost everyone, at some time, will be in a position where they are vulnerable to making poor decisions. Indeed, A 2017 study by the U.K.’s Financial Conduct Authority (FCA) found that 46 percent of U.K. adults display one or more characteristics that signal their potential vulnerability^[5], and one suspects an Australian survey would find similar results.

Language barriers

Australia is a culturally diverse country, and according to the last census, just under one quarter of Australians speak a language other than English at home.

Financial communication, disclosure, and advice are often laden with complex legalese, posing a significant challenge even for native English speakers with high literacy levels.

Despite occasional translations into other languages, such as Chinese, financial services predominantly operate in English. This presents an added layer of complexity considering the diverse dialects within languages like Mandarin, which boasts 93 variations. Additionally, we can’t assume people to be literate even in their own language.

ASIC has never required disclosure documents to be provided in languages other than English. Doing so would entail immense logistical and financial hurdles for product issuers and distributors.

Advisers face the challenge of meeting obligations under the Corporations Act and the FASEA Code of Ethics, which implicitly assume that they have addressed any language or literacy barriers hindering a client’s comprehension of the advice they receive.

Unsurprisingly, language difficulties are central to a significant number of disputes and complaints received by AFCA, so much so that in their Systemic Issues Insights Report^[7] – published in October 2023 – they listed misleading language given to non-English speakers as one of three systemic issues within life insurance. Of course such issues are equally common with investments, as the case study below illustrates.

Case study

In one complaint^[8] upheld by AFCA, a client from a non-English speaking background invested money in a market-linked product which subsequently lost half its value. The investor complained that she didn’t understand the information provided when first making the investment, nor did she understand the remediation offer made to her by the product provider when they first received her complaint. As a result she stayed in the product and lost even more money. She then escalated the complaint to AFCA who found in her favour.

Dementia – its growing prevalence and the potential consequences

One less desirable consequence of our improving life expectancies is the increasing number of people living long enough to suffer cognitive decline.

According to the latest figures from Alzheimer’s Australia^[9], around 480,000 Australians currently live with dementia, of whom just under 90,000 received their dementia diagnosis in 2023.

As people’s cognitive abilities decline, so does their ability to process information and make logical decisions. In the context of complex decisions, such as those pertaining to financial and legal matters, the potential to suffer harm is amplified.

From an advice perspective, a client’s journey through dementia can be a straightforward (although obviously sad) one – where the only issue is a reduced capacity to understand advice, make decisions and issue instructions to their adviser – or a more sinister one, where the client is exposed to financial abuse, often by a family member.

Early inheritance syndrome and cost of living crisis drives elder abuse

Elder financial abuse is characterised by the illegal or improper use of an older person’s funds or resources, with examples including:

mismanagement of their funds or investments
living with the older person and refusing to contribute money for expenses
forging or forcing an older person’s signature
persuading the older person to change the terms of an existing contract, the clauses in a Will or a POA through deception or undue influence
convincing the older person to sign over the title/s of property they own or to sell their properties below true market value
pressuring the older person to accept lower-cost aged care or forego medical treatments in order to preserve an inheritance.

Additionally, increasing life expectancies are pushing out the wealth transfers which occur on death by 10 years or more, giving rise to the much discussed ‘impatient inheritor syndrome’. Impatient to get their hands on their inheritance earlier than would otherwise be the case, and increasingly so in the face of rising real estate values, family members are resorting to a variety of tactics to bring forward that inheritance.

The growth of this phenomenon saw it specifically mentioned by the NSW Ageing and Disability Commission when launching their 2022/23 annual report.

Speaking at NSW budget estimates in November 2023, NSW Ageing and Disability Commissioner Robert Fitzgerald said they had received more than 1400 complaints about financial abuse – including exploitation, misused power of attorney and theft – and that upward trend was partly attributable to growing “inheritance impatience”.

Fitzgerald said: “Our children – my children – will have to wait much longer for the wealth transfer to occur, and that wealth transfer is being pushed out by five to 10 years. What we know about adult children is that they are not patient, so inheritance impatience will, in fact, grow.”¹⁰

Recognising the red flags

While there is no definitive list of ‘vulnerability indicators’, financial advisers – by virtue of the length of client relationships, and the visibility they have of the client’s financial and personal circumstances – are ideally placed to recognise when a client may be exhibiting signs of vulnerability.

Aside from being vigilant around specific events or health conditions which may contribute to vulnerability, advisers should be alert to the general patterns that serve as red flags of client vulnerability, which can include:
Dramatic departure from previous intentions., including abrupt changes in instructions without explanation
Decision-making leading to negative outcomes may possibly indicate vulnerability due to health issues or undue influence
Rambling or incoherent instructions, or difficulty in providing clear instructions, even after clarification attempts
Heightened and erratic emotions, not aligning with the situation or the client’s usual demeanour; and
Instructions relayed through third parties, especially if the client isn’t included/copied in communication or if the third party restricts direct interaction between client and adviser.

Noddy syndrome – informed consent, or just consent?

Advisers should also understand the concept of the ‘Noddy syndrome,’ a term coined by Dr. John Lloyd, a consultant neuropsychiatrist specialising in elderly care. In a 2009 court case Nicholson v Knaggs, he explained how he used the term to explain the tendency of elderly individuals to simply agree with suggestions to avoid causing trouble or inconvenience¹¹. This can apply equally to suggestions from family members, or from their adviser, and encapsulates the difference between ‘consent’ and ‘informed consent’.

Digital exclusion

The digitalisation of most aspects of our lives is generally seen as a positive development, driving both convenience and cost savings, and empowering consumers across most categories by democratising information and education.

But in the rush to develop digital channels for service, transacting, and communication across financial services, we are arguably increasingly the vulnerability of clients who- for a variety of reasons – lack the access to those channels, or lack the digital literacy to use them.

The Australian Digital Inclusion Index (ADII) shows that while digital exclusion is slowly dropping across Australia, there remains a substantial digital divide in Australia.

According to the Index, around 1 in 4 people in Australia are still digitally excluded^[12]. 11% are classed as ‘highly excluded’, meaning they either don’t have access to affordable internet, or don’t know how to use it.

And there is often a correlation between digital exclusion and other signs of vulnerability. People with low levels of income, education, and employment, those living in some regional areas, people aged over 65 and people with a disability are at particular risk of being left behind. If even if they do have access, UK research suggests vulnerable consumers are less likely to be confident with technology^[13].

To the extent that many advisers have enthusiastically adopted the use of virtual meetings, online documentation, educational videos, and secure client portals, it is worth pausing and considering whether this is leaving some clients at heightened risk of vulnerability – at the very least through lack of access to information that is only available through digital channels.

Developing a policy for dealing with vulnerable clients

The Financial Planning Standards Board (FPSB) – of which Australia’s FAAA is a member – is the global standards-setting body for the financial planning profession. To ensure the profession, and its individual practitioners, are equipped to meet the needs of vulnerable clients, they published a guide¹⁴ to help advisers develop their own Vulnerable Client Policy. Developing such a policy will allow advisers to deliver a better, more considered, and more consistent experience for their clients, while also protecting themselves from consumer complaints or regulatory action.

Areas the FPSB recommend for inclusion in such a policy include:

Acknowledging the vulnerability of clients who are new to managing finances, recognising their potential lack of experience in investing, and their need for additional education and guidance on risk and reward trade-offs. Such clients may require more time to grasp presented information.
Consideration of how to categorise vulnerable clients and how to implement checks and balances within the existing advice model to adequately address their specific needs.
A process for identifying vulnerable clients; serving vulnerable clients, including safeguards or additional steps to ensure that a vulnerable client understands what is happening; communicating the vulnerable client policy and any subsequent updates to clients; and helping clients feel protected from financial abuse.
Consideration of factors such as resilience or the impact of life events when seeking to identify vulnerable clients.
When providing financial planning advice to vulnerable individuals who may be accompanied by family members or trusted individuals, be clear about whom is being advised. The financial adviser, in the absence of a Power of Attorney, should not take indirect instructions on behalf of a vulnerable client; instead, they should arrange to take instructions personally from the client.
Recognition of the increased capital security needs of vulnerable clients, especially those no longer active in the workforce, and consideration of the investment term, access to funds, and potential implications of future premium increases.
Maintaining diligence in safeguarding the confidentiality of vulnerable clients, especially concerning medical conditions that may be disclosed.
Incorporating questions into the advice process to uncover potential vulnerabilities in clients, including those related to physical and mental health, life events, language barriers, and financial literacy levels.
Documenting any client observations or disclosures regarding vulnerabilities according to the vulnerability policy to establish a baseline for potential mental and/or physical vulnerability and track deterioration over time.
Advisers should consider developing connections with professionals who could help identify changes in the vulnerability of clients or be able to offer additional support and expertise to the adviser and/or the vulnerable client.
Advisers and their employees should seek ongoing training opportunities to improve their engagement of, and service to, vulnerable clients.

Their guide also includes a list of considerations in how to best structure meetings with vulnerable clients. Suggested considerations include:

Meeting duration – it may be better to conduct several, shorter meetings instead of one lengthy meeting with a vulnerable client.
Meeting location – it may be better to conduct the meeting at the client’s home, or via video.
Meeting time – The vulnerable client may feel more alert and capable of communicating with the financial planning professional during a certain period of the day.
Including a third party in meetings – if it is necessary for a caregiver or guardian to be present at a meeting between the adviser and the vulnerable client, the adviser should consider client confidentiality and potential conflict of interest issues, such as discussing long-term care and welfare costs with the named beneficiary in the room. The adviser should consider the role of a third party and the third party’s ability to influence the vulnerable client during financial advice discussions.

Summary

Safeguarding vulnerable clients within the realm of financial advice has emerged as a critical financial consumer protection imperative, with regulators worldwide intensifying their focus on this issue. The multifaceted nature of vulnerability demands a comprehensive approach from financial advisers, extending beyond mere compliance to a proactive stance that prioritises client well-being.

Recognising vulnerability necessitates an understanding of its diverse manifestations, from health-related challenges to life events and digital exclusion. By acknowledging vulnerability’s prevalence and fluidity, advisers can cultivate a more nuanced approach to client engagement, enhancing their ability to identify and address client vulnerability effectively.

The development of a Vulnerable Client Policy emerges as a foundational step in this endeavour, offering a structured framework to guide advisers in navigating complex client scenarios. By integrating considerations such as client categorisation, communication protocols, and meeting strategies, advisers can foster an environment that promotes trust, transparency, and resilience.

Ultimately, the pursuit of consumer protection in financial advice demands ongoing vigilance and adaptability. As the landscape evolves and client needs evolve with it, advisers must remain committed to upholding the highest standards of ethical conduct and client care. Through proactive measures and informed decision-making, advisers can navigate the complexities of vulnerability with empathy, integrity, and professionalism, ensuring that all clients receive the support and guidance they need to achieve their financial goals and aspirations.