IONA BAIN

Do you see yourself as a “vulnerable” consumer? Maybe not - but as much as half of the population needs greater protection from possible money disasters, harmful psychological tendencies and exploitative behaviour by financial firms. That’s according to Britain’s financial watchdog, which has signalled a new era of tougher regulation and stricter rules around lending.

The Financial Conduct Authority said that a third of the population could suffer if they see even small changes in their circumstances or any rise in interest rates and prices.

Loading article content

It’s a stark warning to households on the edge following the first rise in the base rate for ten years. Mortgage deals are set to become more expensive following the Bank of England’s decision to gradually raise borrowing rates, adding an extra £10 – 20 a month to the average standard variable rate (SVR) mortgage.

The FCA also acknowledged that people who experience health problems and major life events like divorce or bereavement, as well as those with “very low knowledge of financial matters or low confidence in managing money”, can be seen as vulnerable.

Firms who cause harm by taking advantage of human weaknesses, such as a tendency towards inertia and dis-engagement, could face big fines under the new FCA regime, according to David Kenmir, financial services partner at PwC. “The FCA expects firms to truly understand their customers, to base their strategies around how consumers behave according to their ‘real life’ circumstances and not to exploit behavioural biases."

This could mean more attempts to “nudge” people into better financial decisions in much the same vein as auto enrolment, which has pushed millions into pension schemes at work.

And lenders offering high-cost, short-term credit to consumers with "poor financial resilience" will face particular scrutiny, Mr Kenmir said. The FCA is already investigating whether to force credit card firms to help more customers in persistent debt. The UK government has also pledged to copy Scotland’s six week “breathing space” regime for anyone who is struggling with repayments.

Jane Goodland, responsible business director at Old Mutual Wealth, commented: “Vulnerability can come in a range of guises and often customers may not even consider themselves to be vulnerable or at risk. This puts the onus on providers to ensure they are treating the customer appropriately.”

But companies can't always stop people taking a wrong turn. Many financial firms are currently prohibited from giving their customers suggestions or recommendations - unless they are financial advisers.

Heather Hopkins, head of consultancy Platforum, said: “The problem for firms is that they can't provide guidance to consumers who may not be doing the right thing for them. Pension providers in particular have raised this concern.

“For instance, if a client is making what appears to be a bad decision about accessing their pension assets under the pension freedoms [introduced in 2015], it is difficult to do anything. Any suggestion that an investor take a different tack could be deemed advice and is therefore not allowed.”

The FCA’s report comes as MPs announced a fresh inquiry into the nation’s finances, and the Treasury Committee will hear its first evidence next week on whether households are borrowing too much and saving too little.

Nicky Morgan, chair of the Treasury Committee, said: “The UK’s household saving rate has fallen in the last year. 15 per cent of adults are over-indebted. And there is £200 billion worth of consumer credit in the UK.

“Debt is a huge emotional burden for people. Unstable personal finances often emerge as problems raised by constituents, so we hope to take evidence for this inquiry from around the country. We will examine what policies could support households in achieving appropriate levels of saving, and the sustainability of the UK’s household debt and consumer credit.”

The influential money expert Martin Lewis has urged consumers this week to reassess their borrowing behaviour as credit starts to tighten. He pointed to rising interest rates on credit cards offered by Barclaycard, Lloyds and Halifax, as well as shorter 0 per cent balance transfer windows, although some commentators believe competitive deals could re-enter the market in the New Year, when many households try to sort out their debts.

Statistics from the Money Advice Service have shown that there are nearly 700,000 adults in Scotland who are “over-indebted” – around 15.9 per cent of the population, the same as the overall UK average. Recent data from PwC also showed that 11 per cent of Scots are using credit cards to buy essential items from month to month.