Understanding Financial Mental Capacity

Mental capacity is the ability to receive and process information to make and communicate decisions on specific questions. We make decisions all day every day, from deciding what to eat and what to wear to more complex decisions like our finances - whether to spend or save, or whether to take out a certain financial product.

Throughout our lives, we are faced with a variety of choices, with some decisions occurring so automatically that they are unconscious, while others require a little more time to consider. Our ability to make decisions can be influenced as much by our state of health as our environment and personal circumstances. 

In England and Wales, the Mental Capacity Act 2005 sought to codify existing common law to provide a clearer means to judge the decision-making capacity of vulnerable people. It provides a legislative framework designed to cover all decisions especially those concerning personal welfare, healthcare, and financial affairs. Amended in 2019, this Act outlines the components of mental capacity, when it ought to be assessed and how it should be conducted.

The Law presumes that we all have the mental capacity to make decisions about our property and finances as well as our health and welfare. A person is deemed to lack the capacity to make a decision on a specific question on the balance of probabilities if they have a ‘condition of the mind or brain’ which makes them unable:

• to understand the information relevant to the decision
• to retain that information
• to use or weigh that information as part of the process of making the decision, or
• to communicate his decision (whether by talking, using sign language or any other means).

Assessing mental capacity can be challenging and even highly trained consultant Physicians struggle with it. A recent study of mine (which you can read in the Journal of Medical Ethics) found that even senior doctors are significantly less confident than their juniors in assessing mental capacity. 

Financial Competence and Financial Capacity

Managing or directing the management of your personal finances is a critical life skill and maintaining capability in this area keeps us independent and in control of our lives. We use the information presented to us and our financial skills acquired over time, to exercise our judgement to promote and protect our own self-interest.

Financial capability hinges on four key components: knowledge, judgement, competence (or mental capacity), and real-world functioning in the context of several environmental factors and personal circumstances. The tasks and skills required to manage money include but are not limited to:

• Basic monetary skills (e.g., leaving a tip)
• Understanding basic financial concepts (e.g., income, interest, loan, etc…)
• Carrying out simple transactions (e.g., cash or electronic)
• Paying bills by a due date
• Saving and investing 

Financial decision-making involves complex mental processes that not only demand a lot of brainpower but can weigh on our emotions. This is why many of us experience stress or sometimes panic when faced with major financial decisions.

Awareness of this means we increasingly hear the term ‘financially vulnerable’ but what does it mean? The financial watchdog the Financial Conduct Authority (FCA) defines a vulnerable customer as someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.

Expanding on this, vulnerability can be caused through a major life event (such as a bereavement or breakdown of a relationship), a health condition or illness or having low financial resilience to shocks. Irrespective of the underlying cause, financial vulnerability can impact our ability to act in our best interests financially, leaving us at risk of mismanaging our finances.

Earlier this year, the FCA issued guidance for firms to take action in four areas: 

• understanding the needs of vulnerable customers; 
• making sure staff have the right skills and capability to recognise and respond to the needs of vulnerable customers; 
• responding to customer needs throughout product design, flexible customer service provision and communications and; 
• monitoring and assessing whether they are meeting and responding to the needs of customers with characteristics of vulnerability. 

The regulator also published research* showing that during the pandemic, one in three (31%) adults experienced a drop in household income with 14.2 million now having low financial resilience (an increase of 3.5 million between March and October 2020). When you take into consideration the end of the Government furlough scheme and rising living costs, we can likely expect a rise in vulnerability.

As a Physician, I know only too well that an ounce of prevention is better than a pound of cure - and this applies just as much to the financial world as it does the clinical one. Once detected, vulnerable customers can be given access to help to safeguard them from becoming more financially vulnerable, or victims of financial crime.

However, detecting vulnerable customers can be a difficult and time-consuming task for banks and other financial institutions. As it stands, they rely on resource-heavy manual processing or face the prospect of considerable investments in time and cost to build and recruit in-house capabilities.

And while we’re starting to see some banks creating dedicated vulnerable customer teams, many don’t yet have the knowledge or expertise while equipment is in its infancy. Sadly, the needs of vulnerable customers have been relatively unknown – or simply gone undetected until recently.

But this is where we can look to technology for the solution. Artificial intelligence, thoughtfully designed algorithms combined with deep tech, have the power to replace manual processing. This will quickly and efficiently spot anomalies that can help institutions identify when a customer might be displaying characteristics of vulnerability so they can intervene before it’s too late. 

As a doctor, I regularly witness the consequences of financial vulnerability first-hand, but the prospect of digital solutions to this challenge gives me hope for the future. I am excited to be part of something that has the potential to not only increase financial inclusion but also to make everyday life easier and fairer for millions of people. I hope you will join us on that journey.