Applying proportionality to customer vulnerability under the FCA’s Consumer Duty

The UK’s Financial Conduct Authority (FCA) expects firms to deliver good outcomes for retail customers, as defined within Consumer Duty. Central to the Duty is proportionality –which enables firms’ approaches to match the nature of the product or service, characteristics of customers, role in the distribution chain, and size/resources of the firm, all under an objective test of reasonableness.

Proportionality does not equal minimalism. It means fit-for-purpose governance, evidence, and controls which are scaled to risk and complexity – not doing less by default.

The FCA is looking for outcomes, not paperwork. Evidence must be sufficient and proportionate; over-elaborate frameworks are unnecessary where risks are modest, but robustness is essential when consumer harm could be significant. While identification and support may be relatively simple, firms still need records to demonstrate any actions they undertook, as evidence for regulators, as ongoing learning and as evidence should any claims arise in the future.

Large firms' processes do not need to be mirrored by smaller firms. That said, they must still demonstrate reasoned, proportionate choices aligned to their resources, client base, and product complexity.

FG22/5 frames proportionality through reasonableness: what a prudent firm would do in similar circumstances, considering product risk, customer capabilities, including vulnerability, and the firm’s role (manufacturer, distributor, administrator) in the chain.  This does not mean doing very little simply because others in the peer group or distribution chain are not doing their part – being part of the herd is not sufficient.

Proportionality requires firms to scale their governance, controls, data, and remediation to: product/service nature and risk, customer characteristics, firm role, and firms’ size/resources.

When it comes to identifying and providing support needs for vulnerable customers, then every customer needs to be considered – regardless of whether the firm has 10 or 10 million customers.  A firm with 10 customers will simply have records of each customer, and their outcomes, while a firm with 10 million customers will require a sophisticated control and governance structure, so that they understand the outcomes of each vulnerable cohort.

When identifying vulnerabilities, firms need to be proactive to engage and understand their customers, regardless of the size of firm. Firms which regularly communicate with their customers are likely to engage on customer vulnerability and have a high proportion of participation from customers, while firms which hardly engage with their customers, – particularly back-books – are likely to start with much lower levels of participation.

Regarding consumer understanding, a firm dealing directly with consumers will likely engage and communicate directly to explain to each individual, while a manufacturer without direct consumer contact will focus on generic improvements to product literature, using inclusive design methods.

The larger the firm, the greater the need for governance, structure and reporting responsibility. Operating model must assign clear Senior Managers and Certification Regime (SM&CR) accountability – aligning first-line ownership, second-line challenge, and third-line assurance with product risk tiers.

The controls themselves should be proportionate to the risk of harm to the consumer. In simple terms, there is no need for elaborate governance and risk management if the number or impact of the harm is minimal to the consumer. Equally, impact of harm is not about size. A cost or loss of £100 to a person on the breadline may be highly impactful, compared to a £1,000 loss to a very wealthy individual; their capacity for loss is far less. A minor inconvenience to a resilient individual may push a person who is suffering from anxiety over the edge. A poorly worded communication can be totally confusing to a dyslexic person. Harmful outcomes and potential harm to the consumer are how we should consider proportionality.

Proportionality should be assessed for the potential for harm, as well as the actual harm reported. This may be difficult, but with so many products taking years to mature, or result in claims/pay-out, firms must look ahead at the scenarios that may play out. For example, understanding whether a consumer has a will or lasting power of attorney is far better assessed and acted on than waiting to discover the outcome.

Good and bad outcomes are difficult to measure. Many firms may measure customer satisfaction, but this is different to outcomes. Measuring complaints and cases upheld by the Financial Ombudsman Service may or may not correlate to poor outcomes across the customer base, especially for different vulnerable cohorts. Most firms have yet to identify and record customer vulnerability in a consistent manner, one that is sufficiently able to compare outcomes – they don’t know what they don’t know.

Proportionality may change, as firms grow, add different products or indeed as previously unknown harms emerge – as these things change, proportionality may change also

For example; firms may decide that savings products such as ISAs may be considered to be good for people – and, so long as they can access funds quickly, inherently deliver minimal harms. But what if the consumer is paying high interest rates on credit cards, when they could be using the ISA funds to pay this down? What if they could use the ISA funds to pay for a hip replacement, rather than waiting for two years? All of this, because they did not know they could withdraw the funds. Does the firm have the correct correspondence address – or has the consumer married/moved house and forgotten about the ISA? These are all potential harms, that can be minimised – by keeping in touch with customers, reminding them they have the product, or suggesting how they may use the product, trying to ensure that the customer understands the product and so on.

Proportionality is the operational heart of Consumer Duty: it enables firms to focus effort where it matters most, demonstrate reasoned choices, and deliver better consumer outcomes without unnecessary burden. Proportionality is not about firm size or product, it is about the potential for harm, and actual harm, for consumers.