FCA Guidance on Designing Consumer Segments for Targeted Support
Summary
The FCA has published guidance for financial firms on designing consumer segments for targeted support. This guidance provides practical examples and considerations to help firms comply with existing rules, particularly in light of the Financial Ombudsman Service's review process.
What changed
The Financial Conduct Authority (FCA) has issued new guidance aimed at firms that are designing consumer segments for the purpose of providing targeted support. This document offers practical examples and considerations to assist firms in making judgments when developing these segments, referencing previous policy statements and highlighting that the guidance is not a template but a set of considerations. It also notes that the Financial Ombudsman Service will take this publication into account when assessing complaints related to targeted support.
Firms are advised to review the guidance to ensure their consumer segmentation strategies align with FCA expectations. While no specific compliance deadline is mentioned, firms should proactively incorporate these considerations into their design processes. The guidance emphasizes that there are multiple ways to comply with the rules, and the examples provided are illustrative rather than prescriptive. Engagement with the FCA's pre-application support service is also encouraged for firms developing their targeted support propositions.
What to do next
- Review FCA guidance on designing consumer segments for targeted support.
- Incorporate practical examples and considerations into firm's consumer segmentation strategies.
- Engage with FCA's pre-application support service if developing targeted support propositions.
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Read information and examples for firms designing consumer segments for targeted support
Summary
When we published our policy statement (PS25/22) on targeted support, we said that we would publish further detail to support firms in making judgements when designing consumer segments. We are sharing various practical examples to help firms make these judgements.
Our pre-application support service (PASS) is available and we are happy to engage with firms in more detail as they develop their targeted support propositions.
There are many ways firms can comply with our rules and the examples below are not a template for the design of targeted support models, neither is this an exhaustive list of the things firms should consider when designing their segments.
We have spoken to the Financial Ombudsman Service. When deciding what is fair and reasonable in all the circumstances of a complaint, this publication will be one of the things that it will take into account if a customer brings a complaint against a firm regarding their targeted support.
Defining common characteristics
Requirements for firms
When firms are creating a consumer segment and defining common characteristics, they should consider the following in particular:
- A consumer segment is a group of individuals in a situation involving a shared financial support need or objective and, where relevant, common characteristics (COBS 9B.4.4R).
- To the extent that common characteristics are relevant to the definition of a consumer segment, they must include both: including characteristics; and excluding characteristics (COBS 9B.4.16R).
- When defining common characteristics of a consumer segment, firms should have regard to what would make a suggestion suitable or unsuitable for an individual within the consumer segment (COBS 9B.4.18G).
- Consumer segments must be defined at a level of detail that is sufficiently granular as to enable firms to assess whether a ready-made suggestion would be suitable for an individual within that segment (COBS 9B.4.9R (1)).
- Consumer segments must also not be defined at a level of detail that a firm in the business of providing investment advice would reasonably associate with a comprehensive consideration of a consumer’s characteristics or circumstances (COBS 9B.4.9R(2)).
How firms may consider these requirements
Firms have to judge how to design consumer segments at a sufficiently granular level while not comprehensively considering the consumer’s circumstances or characteristics.
The complexity of a situation is likely to be relevant to the type and/or number of common characteristics needed to ensure that segments are sufficiently granular to ensure a ready-made suggestion is suitable for an individual in the consumer segment.
More complex situations will usually require a higher number, or more detailed set, of common characteristics to define suitable ready-made suggestions. Whereas it is likely to be possible to specify a suitable ready-made suggestion for a less complex situation based on fewer, or less detailed, common characteristics. For example, assessing the suitability of suggesting a monthly contribution into an investment fund where consumers are holding ‘excess cash’ beyond an emergency buffer will likely require fewer and less complex common characteristics compared to supporting consumers to generate an income from their pension pot.
If a firm can’t define a suitable suggestion without undertaking a comprehensive consideration of a consumer’s circumstances or characteristics, it’s likely that the consumer will be in a situation that can’t be addressed through targeted support.
Examples showing a level of detail that would likely be associated with a comprehensive consideration of a consumer’s circumstances or characteristics:
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Example A
Where a firm has pre-defined a situation to help consumers invest cash savings, it shouldn’t need to pre-define common characteristics relating to the value of a partner’s income or whether a consumer pays off their credit card in full every month.
It’s likely that these data points go beyond what’s necessary to specify a suitable ready-made suggestion for a group of consumers.
Example B
Where a firm has pre-defined a situation to support consumers who are potentially drawing down unsustainably on their pension, it shouldn’t need to pre-define common characteristics involving the cost of mortgage repayments or the value of any inheritance windfalls.
This is because this would involve analysing consumers’ individual cashflow positions which would likely be unnecessary for specifying a suitable ready-made suggestion for a group of consumers.
This is due to a sustainable withdrawal rate targets a withdrawal pattern that can be maintained for a lifetime, irrespective of the expense needs of consumers.
More generally, our rules do not preclude firms from using retirement planning tools or designing a cashflow projection for the purpose of aligning consumers to consumer segments based on common or banded outcomes which are identified from the tool or projection.
Examples where firms could segment consumers to avoid becoming a comprehensive consideration of a consumer’s circumstances or characteristics:
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Example C
Where a firm has pre-defined a situation to support consumers who want to generate an income from their pension for retirement, it could pre-define a common characteristic of a consumer’s total pension provision. For instance, the firm might consider asking customers the approximate total value of their pension savings.
Were the firm to go further and consider information about the specific features of every pension, this is more likely to be associated with a comprehensive consideration of a consumer’s circumstances.
Example D
Where a firm has pre-defined a situation to support consumers who may be under-saving for retirement, it could consider banding information into ranges to ensure consumer segments are sufficiently granular.
Firms might choose to pre-define common characteristics involving a consumer’s age in appropriate age bands, rather than defining segments for every age.
So, for example, a consumer aged 43 may be put in a segment of all consumers who have the common characteristic of being aged 40-44.
Creating consumer segments based on age groups fits with the nature of targeted support.
Considering data held on a consumer
Requirements for firms
Our rules require firms to consider additional information they hold about a customer that may affect the suitability of a ready-made suggestion, beyond what the firm needs to align them with a pre-defined consumer segment.
A firm cannot ignore information that indicates that a suggestion may not be suitable for the consumer. But we expect that if they’ve already established their ‘excluding characteristics’ correctly and verified that the consumer aligns with a consumer segment, there shouldn’t generally be any other information that would render a ready-made suggestion unsuitable.
Firms don’t need to assess suitability at the individual consumer level when providing targeted support. We don’t expect them to consider all the data they hold, nor undertake a comprehensive consideration of a consumer’s circumstances or characteristics. This wouldn’t fit with the purpose of targeted support – which is to provide ready-made suggestions designed for groups of consumers based on limited information.
When firms are considering wider data they hold on the consumer, the following rules and guidance are particularly relevant:
- A firm must not give a client a ready-made suggestion when it is, or ought reasonably to be, aware of information about that client that indicates the ready-made suggestion may not be suitable for them (COBS 9B.5.11R).
- COBS 9B.5.12G sets out a series of considerations for firms in this area that may be helpful. In particular, how a firm should consider what is readily accessible to the business area of the firm engaging in the provision of targeted support.
- Firms are not expected to request information from a client during the targeted support journey, other than that needed for them to provide the targeted support service (COBS 9B.5.13G(1)).
A 3-step approach firms may wish to use when considering these requirements
1. Consider what is readily accessible
We don’t expect firms to consider all the data they hold on a consumer or for them to undertake detailed searches of individual customer transactions to capture wider data beyond that needed to align a consumer with the common characteristics of a consumer segment.
They should consider what’s readily accessible (or ought to be) to the specific business area providing targeted support.
When doing this there is no expectation that firms undertake an exhaustive discovery search of all potentially accessible data points.
Examples of how firms may consider what information is ‘readily accessible’:
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Example E
A firm has pre-defined a situation to support consumers holding ‘excess cash’ beyond an emergency buffer. It has pre-defined relevant common characteristics but it also offers credit cards and holds data on a consumer’s credit card history in a different business area.
Such data may not be ‘readily accessible’ to the business area providing targeted support if accessing it would require extensive searches, processing, or significant effort more generally.
That said, the firm cannot inappropriately ring-fence the business area providing targeted support to avoid the need to consider information held elsewhere in the business.
Example F
A firm with access to a customer’s current account transactions has pre-defined a situation to support consumers holding ‘excess cash’ beyond an emergency buffer.
If it analysed these transactions, it may be able to identify patterns of behaviour, such as spending habits, beyond the common characteristics it has pre-defined.
This would not necessarily be ‘readily accessible’ data, given the analytical steps the firm would have to take to identify those patterns.
The targeted support rules do not require detailed analysis of individual transaction data.
2. Consider whether the common characteristics capture the wider data points
We expect firms to pre-define broad common characteristics to assess suitability for individuals in the group. Given this, there may be very specific data points that fall outside these pre-defined characteristics, which are readily accessible.
They might consider whether the potential impact on suitability the wider data point raises is already captured by a common characteristic. In this case the common characteristic should cover any impact on suitability, and consideration of it would be unnecessary.
Example of how firms might navigate this interaction between common characteristics and wider data:
Example G
A firm has pre-defined a situation to support consumers holding ‘excess cash’ beyond an emergency buffer.
It has pre-defined common characteristics which include whether the consumer has an emergency fund and a characteristic related to debt.
The firm may separately have readily accessible data indicating a consumer gambles regularly and once defaulted on a mortgage payment. But because the firm’s common characteristics consider the existence of an emergency fund and a consumer’s debt, it may conclude that the suitability of the ready-made suggestion for a consumer is addressed by aligning with these characteristics without the need to consider the additional information.
3. Highlighting a data point that has not been considered
A firm may satisfy itself that a wider data point is not readily accessible or is covered by an existing common characteristic, but still choose to disclose to the consumer that it did not consider such data.
Our rules require firms to clearly disclose the nature and limitations of targeted support and this may include explaining the information the firm has not considered. This may be particularly relevant where there is a potential gap between the information which is available to the business area of a firm providing targeted support and the scope of information of which a consumer might expect the firm to be aware.
Firms are reminded of the requirement to test their disclosures around the provision of their targeted support service and to take reasonable steps to ensure consumer understanding of those disclosures (COBS 9B.6.9R).
We don’t expect firms to give consumers complex disclosures containing lengthy disclaimers and caveats. However they should consider providing disclosures and warnings if, for example, they’re concerned about consumers’ expectations or understanding of the service.
We encourage firms to consider such disclosure if they have particular concerns in this area. In doing so firms should consider their Consumer Duty obligations to support consumer understanding and avoid foreseeable harm.
Using reasonable assumptions
Requirements for firms
The suitability of a ready-made suggestion is determined by reference to the shared need or objective and, where relevant, common characteristics of the consumer segment the consumer has been aligned with.
However, firms can choose to make assumptions to limit the number of common characteristics they use. Our rules require that the suitability of ready-made suggestions be determined by referring to the common characteristics of the relevant consumer segment, so any assumption cannot be material to the suitability of the suggestion.
When creating consumer segments and making assumptions, the following rules and guidance are particularly relevant:
- A firm must ensure that any assumptions are reasonable and referable to evidence about the type of individuals covered by the consumer segment (COBS 9B.4.11R(2)).
- A firm can apply reasonable assumptions to consumer segments with a view to limiting, where appropriate, the level of detail in the specification of consumer segments, where appropriate (COBS 9B.4.10 G (2)).
- A firm must be satisfied on reasonable grounds that the ready-made suggestion that it specifies for a consumer segment is suitable for an individual in that segment (COBS 9B.4.20R).
- A firm will need to identify a recommendation that addresses the shared financial support need, or meets the shared objective, of an individual who aligns, where relevant, with the common characteristics of the consumer segment (COBS 9B.4.21G).
- A firm must assess the suitability of a ready-made suggestion by referring to the shared financial support need or objective of the relevant consumer segment and the common characteristics of the relevant consumer segment (COBS 9B.4.22G(2)).
How firms may consider these requirements
Overreliance on assumptions
The suitability of a ready-made suggestion will need to be assessed by reference to the shared financial support need or objective and, where relevant, common characteristics (noting wider rules such as COBS 9B.5.11R on other information held).
Where information is material to suitability for the consumer segment (ie, if an assumption was wrong, then there is a more than negligible risk that the recommendation would be unsuitable for the consumer segment) it should be reflected as a common characteristic.
How a firm might consider this:
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Example H
A firm wants to support consumers holding cash savings who may benefit from investing so it pre-defines the existence of an emergency fund as a common characteristic.
This is because the presence of an emergency fund is material to whether it is suitable for a consumer to invest or not and therefore it cannot be assumed the consumer has such a fund.
Depending on the other common characteristics the firm has pre-defined, the firm may choose to use information they already hold about the size of the customer’s cash savings to determine whether they have this characteristic.
Example I
Where a firm has pre-defined a situation to support consumers around how to generate an income from their pension pot, it is unlikely to be reasonable to assume they would prefer a flexible income over a fixed income.
This is because the consumer’s need for flexibility or certainty of income is material to the suitability of the decumulation product suggested, meaning it would need to be part of the pre-defined common characteristics.
Widely accepted assumptions
Assumptions are likely to be reasonable if they are ones which the market and/or consumers would generally agree with.
How a firm might consider this:
Example J
Where a firm has pre-defined a situation to support consumers holding ‘excess cash’ beyond an emergency buffer which could be invested for growth, it would be reasonable for the firm to assume that consumers would want their money to be invested in a way that beats inflation when designing the ready-made suggestion.
The firm might consider this assumption to be reasonable on the basis of established industry understanding, historic consumer preferences or, in this case, a common acceptance of the proposition.
Existing assumptions used outside of targeted support
Assumptions are likely to be reasonable if they’re ones which firms already use when providing other forms of investment advice or when managing pensions.
How a firm might consider this:
Example K
A firm has pre-defined a situation to support consumers who are intending to take income withdrawals, by suggesting a sustainable withdrawal rate.
It is likely to be reasonable for that firm to consider average life expectancy based on evidence about how long people live (ie, from population data) and then assume the consumer lives for a reasonable period beyond that.
This is an assumption already used under other forms of advice, so is likely to be a reasonable assumption under targeted support.
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