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Feb 26, 2024

What is "Financial Vulnerability" - and how do you spot it?

What is "Financial Vulnerability" - and how do you spot it?

Gambling companies will soon have a clear obligation to take steps to identify financially vulnerable customers at different levels of spend. As many as two in five active accounts could need such an assessment each month.

So what exactly is "financial vulnerability"? And how do you measure it in order to develop a realistic and effective action plan to protect your players and your business?

First the bad news:

There is no standard measurement for financial vulnerability equivalent to, say, the PGSI. Gambling operators are by now very adept at looking for "markers of harm" in wagering data which were developed by looking at the behaviours of known problem gamblers. There is no equivalent (yet) for financial vulnerability.

And now the good news:

The Financial Conduct Authority has recently implemented its Consumer Duty which requires all lenders, payment companies and Open Banking providers to have active measures in place to identify and support vulnerable customers. Their guidelines on how to implement this provide a solid basis for the Gambling industry to work from.

The FCA approach which gambling operators can build from

The FCA don't try to measure financial vulnerability or reduce it to a single number. Instead, they focus on how firms they regulate can identify people who may be at high risk, and then how the firms respond.

There are four signs which financial firms are now required to look out for:

  • Capability: is the customer able to understand the financial product and are they "money literate"?

  • Resilience: does the customer have sufficient resources to withstand a financial shock such as a boiler needing to be replaced?

  • Adverse Life Events: has the customer experienced an event such as a divorce or bereavement which may have affected their finances?

  • Health: is the customer suffering an on-going health condition which impacts their ability to earn a living or has a high cost associated with it?

The first two signs - financial capability and resilience - have clear relevance to gambling harm. A person who is generally unable to understand their finances is clearly more at risk of losing more than they can afford than someone whose mental balance sheet is highly attuned. Similarly, someone who is gambling their last £50 in the hope of making money to cover their bills is equally in a dangerous position and mindset.

How gambling operators can incorporate the FCA approach into their policies and processes

  1. Use relevant data points in frictionless checks to identify financial vulnerability risks more accurately.

    We call this the "CCJ problem". People receive CCJs for a very wide range of things, from unpaid parking fines to significant loan defaults. To identify vulnerable customers more accurately, operators need to filter out items which are not related to financial health - for example, an unpaid parking ticket sent to the wrong address (it happens more than you might think). Operators should use a platform like DOTRUST COMPLETE which allows them to calibrate the size and the source of the indicators.

    This speaks to the FCA Capability and Adverse Events tests. Where a person has a pattern of financial problems which have reached a court or official settlement, the situation is difficult. Operators who are able to effectively understand this from the data will be much more effective than those taking a blanket approach.

  2. Sensitise your checks to younger and older customers

    The FCA requires financial firms to sensitise their evaluation for age. Younger people tend to have fewer commitments but also lower incomes; older people tend to have fixed lower incomes and outgoings. This often translates into tight circumstances where there is little margin for error.

    Of course this doesn't mean older or younger people can't or won't gamble, only that the impact for them of a large loss is likely to be relatively greater than for a person with more resources. Operators are likely to be expected by the GC to take age into account, particularly during frictionless assessments where the operator does not have proof of income, only estimates or signals from public records.

  3. Go beyond income in enhanced checks

    Income is to financial vulnerability what wagering turnover is to hold: all heat and little light. A person on a high salary may have a very small disposable income and, as we have often seen, people on a low income might have a lot of money to spend on gambling from (say) a large win.

    For this reason, the best way to identify financially vulnerable customers from bank data, once you reach this point, is to dig into other factors. We recommend setting a standard risk evaluation method in your company so that you can compare the results across customers and over time to ensure consistency and improve accountability in the event of an inspection.

    Key things to look for are:

    • Drops in disposable income; take the net receipts after tax and deduct housing, food, energy and fuel. Financial vulnerability is indicated by a low value relative to gross income, or a sudden drop which indicates a financial shock of some kind.

    • Relying on credit; if a customer's credit card bill suddenly leaps up, or they have been opening new credit accounts, this is a strong signal of financial stress.

    • Betting with the rent; if a customer suddenly starts making gambling deposits from an overdrawn or very low balance account, and depletes their account to the point where bills are not being paid.

    All of these can be measured objectively and given a value which is objectively testable and defensible as a basis for designing and implementing strong procedures.

    In a future post we'll take a closer look at the LCCP for financial risk assessments once they are published to help operators build a strong and effective compliance strategy.

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All materials are copyright 122 Ideas Limited, t/a Department of trust
Company number 12979583 (England and Wales). 86-90 Paul Street London EC2A 4NE