The current economic environment of high inflation, higher cost of living and volatile financial markets has created unprecedented levels of uncertainty and lower returns on average for today’s investors. Moreover, financial products and services have become increasingly complex brought about by technological innovations, creating challenges for consumers who are less tech-savvy and financially-literate. As a result, many investors are at risk of suffering fraud, financial exploitation, or the effects of unsuitable investments due to the changing nature of financial services, financial decision-making and access to information.

Against this backdrop, regulators globally have focused their efforts to better understand and identify the possible drivers of investor vulnerability. While the underlying reason for the state of vulnerability can be multifaceted, a benchmarking exercise conducted by the Institute for Capital Market Research Malaysia (ICMR) to compare the definitions from various jurisdictions suggests that vulnerability triggers can be grouped into 3 key drivers:

• Behavioural and access drivers – which include one’s perception of their own financial status, financial stress, their savings behaviour including retirement readiness, health issues and disabilities, education, language, financial literacy and digital capability.
• Situational drivers – which include one’s experiences of specific life events or temporary difficulties such as bereavement, job loss, income shock, death within close relatives as well as changes in expenses and savings behaviour.
• Industry-related drivers – which include one’s experiences with regards to the actions of individual financial providers, unprecedented level of digitalisation and complexity of financial products, firms that do not act with appropriate levels of care, products which are inappropriate for a particular client as well as inadequate/complex or misleading documentation/information.

To better understand these new age vulnerabilities within the Malaysian context, ICMR embarked on a nationwide study in 2022 to capture an understanding of financial wellbeing, state of mind and challenges faced by individuals in today’s environment. This study builds on ICMR’s extensive demand-side research output over the past years and represents the next step in that direction. Some key findings from this research are:

• Behavioural and Access Drivers seems to affect most Malaysians where many perceived themselves to be financially unstable or are living paycheck-to-paycheck despite their household income levels coupled with mental stress with regards to their finances
• There are still gaps between awareness and application when it comes to good savings behaviour where most who are aware on the right savings behaviour may not necessarily save as much.
• Subjective perceptions of financial security are correlated with savings behaviour independent of reported monthly income, suggesting that the latter alone does not determine individuals’ ability to save and invest.
• There is lack of retirement readiness especially amongst retirees and gig workers where we also found that majority of those above 41 years old are not able to meet a basic savings target for their age group. There was also a shift of perception from EPF being a retirement fund to an emergency fund which was influenced by the COVID-19 withdrawal schemes.
• Financial literacy remains low despite majority are highly confident in their own financial capabilities.
• More than half were affected by multiple Situational Drivers where majority felt that their expenses had outpaced their monthly income and were negatively impacted by certain difficult events that happened to them in the last 12 months.
• Ill health is an issue that may compromise earnings and lead to significant future expenses.
• Those who were exposed to Industry-related Drivers experience multiple difficulties especially due to insufficient information or knowledge and faced certain levels of misconduct.

Our study also found that vulnerability is not easily categorised and that in practice different ‘types’ of vulnerability are frequently overlapping and closely interconnected – meaning that distress and suffering (including financial difficulties) are not always easily attributable to a single particular ‘cause’. Even when cases of vulnerability are more straightforward, the experiences within each vulnerability category are often as diverse as the experiences of vulnerability across the group as a whole.

As such the study proposes a dual and systematic approach to address vulnerabilities by building financial resilience across the population and to institutionalise a targeted approach to deal with vulnerable investors. This research also highlights the need for greater collaboration, through a whole-of-nation approach which goes beyond the ambit of any single regulator or agency, in order to implement holistic reforms that tackle both the structural and individual challenges. This must then be coupled with behavioural insights as well as embedding more rigorous evidence-based approaches to design and evaluation such as Randomised Control Trials (RCTs) into the policy cycle for more effective outcomes.

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