Targeted support: firm considerations when designing consumer segments

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)).

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:

Examples where firms could segment consumers to avoid becoming a comprehensive consideration of a consumer’s circumstances or characteristics:

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)).

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’:

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:

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.

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)).

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:

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: