FCA Consumer Spotlight: regulator’s miss-selling early warning device or new customer segmentation tool for all?

9 March 2015

By Natanje Holt, Managing Director, Dunstan Thomas

Can the FCA’s new consumer profiling tool go further than helping the regulator reduce the risk of miss-selling to provide the basis for an effective customer segmentation and communications tool for providers and advisers alike? 

On the 19th January 2015 the FCA unveiled its first Consumer Spotlight market research results and accompanying microsite. The Spotlight research offers a wealth of market research data based on a comprehensive questioning of more than 4,000 consumers across the UK. The questions that the regulator put to a wide cross-section of us cover areas like attitude to risk, money management capability, as well as financial commitment and attitude to genera insurance, protection, pensions, investments, mortgages and other financial products. It even looks at the extent of pension provision that different groups have.

Based on specific criteria the FCA has created 10 different customer segments ranging from ‘Retired with Resources’ to ‘Hard Pressed’ and ‘Starting Out’. For example, we now know that 53.8% of the regulator’ sample has no pension savings at all for example, compared with 28.6% of the Busy Achievers (one of the more affluent segments) who have no pension savings.

There is no doubt that the charts offer lots of useful free information about UK consumers for providers and advisers to mine. Furthermore, as the FCA indicates, this intelligence can be used by retirement market players to: “see the characteristics, attitudes and behaviours associated with each group. This information can help firms design products and communications that work well for different, specific consumers”.

The FCA itself make it clear that they have done this work to help them direct their own communications towards groups most vulnerable to miss-selling. To quote the FCA report:

“..we have used the data to build up a profile of the typical victim of financial scams, and we have been able to use this to target our communications. We may also use Spotlight data to develop our supervisory view of firms and their customers, or for our enforcement work when exploring the relationship between firms and their consumers.”

However a dark warning is also given for providers planning to use the Spotlight data as the basis for segmenting their customer-base: “Although it may inform a firm's thinking and planning, the model is not designed for commercial development. We do not intend to enable firms to profile their own customer base using the model for their own commercial benefit.”

One of our first reactions to the 10 segments themselves is that some of them look very closely aligned to others. Take for example ‘The Mature and Savvy’ versus the ‘Busy Achievers’. These groups are interestingly the least well-represented in the sample (Mature & Savvy are the smallest group at only 4% of the whole group) and it is easy to envision people moving between these segments quite easily. It might be worth looking at various ‘life events’ which trigger migration into a different segments for example. These events might be the trigger for communication with them by relevant parties (including the FCA perhaps?)

It would also be helpful to look more closely at gender differences which are not easily analysed using the microsite at this point. I will not be alone in scrutinising the research methodology used further but it is clear that the microsite and its associated online tools is a great starting point. The only other online tool of its kind developed by the Money Advice Service a is highly focused on indebtedness. The FCA’s work suggests a new direction which providers and platforms should investigate.

Most customer information that is held by providers today is in CRM systems and one suspects is not used nearly as effectively and regularly as it ought to be. Platforms don’t offer advisers any segmentation tools today and advisers’ suitability letters only really establish attitude to risk and capacity for loss, not really assessing the customers’ real financial knowledge.One way the FCA might extend the use of its Consumer Spotlight is to develop a Financial Vulnerability Assessment tool or even a short ‘Financial Education’ test to help the industry to do their all-important ‘know their customer’ work better.  In this way it would be easier for advisers to tailor their communications with different types of customers according to known knowledge and ‘vulnerability’ levels.