UK FCA sets out good and poor practice for firms when designing consumer segments for targeted support

The UK Financial Conduct Authority (FCA) has published a new webpage setting out good and poor practice to support firms when designing consumer segments under the new targeted support regime. The FCA emphasises that firms have flexibility in how they comply with the FCA's rules and that these examples are illustrative only; they should not be treated as a template nor as an exhaustive list of the things firms should consider when designing their segments.

Key points to note include:

• Defining common characteristics: firms must 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. Where a firm cannot define a suitable suggestion without undertaking a comprehensive consideration of a consumer's circumstances or characteristics, it is likely that the consumer will be in a situation that cannot be addressed through targeted support.
• Considering data held on a consumer: the FCA outlines a three-step approach firms may find helpful: (i) firms should consider what information is "readily accessible" to the specific business area providing targeted support; (ii) firms should consider whether the common characteristics capture the wider data points; and (iii) where relevant, firms should highlight a data point that has not been captured.
• Using reasonable 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. However, firms can choose to make reasonable assumptions to limit the number of common characteristics they use. The FCA reminds firms that where information is material to suitability for the consumer segment (i.e., 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 rather than an assumption. The FCA also indicates that widely accepted assumptions are more likely to be reasonable where they would generally be accepted by the market and/or consumers. Existing assumptions used outside of targeted support are likely to be reasonable if firms already use them when providing other forms of investment advice or when managing pensions.

The FCA states that the UK Financial Ombudsman Service will take into account this information and examples when determining what is fair and reasonable in the circumstances of a complaint, if a customer brings a complaint against a firm regarding their targeted support.

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