A paper commissioned by the Financial Conduct Authority (FCA) has found ‘problems at every stage' in the way firms deal with vulnerable consumers.
Vulnerable consumers are those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the old.
Financial services, products and systems often ‘streamline' consumers and are "not designed to meet nonstandard needs of those who don't fit into a set mould", the paper said.
Part of a series of ‘occasional papers' commissioned by the regulator and designed to encourage debate among academics, practitioners and policymakers, the paper called on firms to improve the understanding of their customers.
If staff are well trained they are less likely to apply such policies in an overzealous manner which can create problems for customers
It warned vulnerable consumers risk withdrawing from the mainstream market, which could lead to their "problems to spiral if their needs are not met".
It found most problems related to poor communication. Customers are overwhelmed by complex information, often finding it hard to distinguish between promotional material and important messages about products.
Firms' frontline staff were not sufficiently trained to have a "proper conversation" and to know how to refer customers on, the paper said.
It found some firms had been "overzealous" in their implementation of some rules, such as those around data protection and affordability, preventing them from meeting the needs of vulnerable customers.
The report suggested firms put in place a "high-level policy on consumer vulnerability".
This includes displaying clear and simple information and explaining products for as long as they are used by customers.
Firms need to be flexible in their application of terms and conditions of products and services and ensure staff have a proper understanding of policies designed to combat financial abuse and fraud.
"If staff are well trained they are less likely to apply such policies in an overzealous manner which can create problems for customers. For example, proper affordability is vital to the wider protection of consumers, but firms should have systems in place to allow for appropriate discretion," the paper said.
The regulator published a Practitioners' Pack' on its website designed to assist firms to address the needs of consumers in vulnerable circumstances.