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FCA examines consumer biases when buying financial products

Martin Wheatley Pose 480
FCA chief executive Martin Wheatley

The Financial Conduct Authority has set out how it can learn from the mistakes consumers make when buying financial products to inform the regulator’s use of its new product intervention powers.

The regulator has published two papers on behavioural economics, the first of which looks at how consumer biases can lead to a lack of market competition. The second paper uses case studies to show how consumers have reacted to different redress and customer contact letters.

It says consumer biases such as credit card spending for immediate gratification, an individual’s excessive self-belief when it comes to stock picking, and following financial advice because “an adviser is likeable” can cause problems which can be exacerbated by the way products are designed, sold and marketed.

The regulator points out some firms may not be “deliberately exploiting” their customers and just responding to consumer demand.

It wants to use behavioural economics to intervene to protect consumers where necessary, such as by requiring firms to provide information in a certain way, controlling product distribution, and potentially banning products altogether.

The FCA says it will also use insights on behaviour to develop policy, analysing firms’ business models, and building evidence for enforcement cases.

FCA chief executive Martin Wheatley will tonight use his first speech since the new regulator came into operation to talk about how the regulator will use work on consumer biases to become a more effective regulator.

He will say: “’Buyer beware’ becomes hard to defend when unsophisticated customers are buying seriously complicated financial products, where the risk of failure is far more dangerous than a decision in the supermarket to buy three bananas instead of one.

“There are questions many investors simply will not ask because they are humans, not automatons.

Wheatley will say he is keen to see the regulator use behavioural economics to allow consumers to compare product charges and assess why people are put off from switching products.

He will add: “We should not pretend this is a straightforward discipline. There is no mechanical routine to follow when we apply behavioural economics to regulation. It will require us to change the way we identify risks, diagnose problems and troubleshoot.

“It is also worth pointing out behavioural economics is not enough, on its own, to guarantee good regulation or strong financial products. It is a part only of the new FCA’s identity.”


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Oh no! Just when it seemed we were getting a little common sense from the regulator they seem to think that we may be too “likeable”.

  2. There is a lot of sense in what Wheatley’s saying. It stands to reason that consumers should be objectively guided in making informed decisions and, in circumstances where the adviser fails in their duty of care, the consumer should have a right to redress.

    However, consumers have responsibilities as well as rights, and, therefore the FCA should be prescriptive about what measures a regulated firm should take in order to have an effective defence in the event of vexatious litigation.

    In recent times, the burden of proof has been on the adviser to prove that they have not mis-sold – often being judged with the benefit of hindsight.

    It stands to reason that, if the regulator is employing behavioural science, they should establish what processes need to be evidenced in order to establish that the adviser met their duty of care and what point responsibility for the decision transferred to the investor.

  3. The last lot thought advisers were biased and wasted millions on regulation.

    It seems this lot thinks Jo Public is biased – I wonder how many millions this white elephant will waste.

    If they just banned the distribution of all financial products altogether there would be no more problems.

  4. A nice “safe” bank or building society deposit account where there is a odds on loss each year when inflation and tax is taken into consideration is assumed to be the regulators preferred choice!

  5. Is interesting that he talking about banning products and new ways to measure the success of financial advice – in principle I have no problems with this but maybe he should also concentrate on the basics.

    When is the FCA going to get serious about cracking down on websites who promote financial services products and services without authorisation. Martin Wheatley recently announced it was going to crack down on advisers who use social media inappropriately. The fact is it isn’t necessarily advisers who are using social media inappropriately it is the unauthorised websites and lead generation firms.

    If you report any of these websites to the FCA they will just state that these websites are exempt. How can a website that promotes services and in some cases products for financial services be exempt from regulation. I even have an email from the FCA stating that Article 33 of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“the RAO”) exempts lead generation firms from authorisation.

    Now I would encourage any IFA to go and read this particular part of the FSMA2000 as in my opinion this only exempts companies and individuals from making a referral to an IFA in a natural course of their business. E.g. clients and professional bodies like solicitors and accountants. It does not exempt lead generation firms or marketing companies from strict marketing legislation in connection with financial services.

    If you FCA cannot get basic rules like authorisation correct then had a hell are they going to use new powers like the one mentioned in the article above.

    I like many IFA’s have serious concerns about lead generation firms particularly when these companies could potentially be selling data onto multiple organisations. They could even have connections with criminals as there are no checks on whether these companies are acting lawfully or unlawfully. The regulator is showing little or no interest in this particular area and I don’t know about any other IFA operating in the UK at present but why should marketing firms who do not hold authorisation and don’t pay into the system of regulation be allowed to operate. After all it increases our marketing budgets as we fight to get our listings appear above these marketing firms on Google and other places.

    I have recently asked the FCA/FSA under a freedom of information act to provide statistical data on how many reports they get on illegal websites and how many of these websites they have close down over the last 12 months. I for one would like to know where my money is being spent on how effective the regulator is, in achieving one of its main principles which is protecting the consumer from unauthorised websites and advice.

  6. I can see where Martin is coming from. As I understand it he is trying to close down some of the defence arguments when a firm is exploiting trust given to them by the customer, thus leading to a greater number of enforcement actions against those who are the exploiters.
    I understand why he uses the words ‘the adviser was likeable’, however it would have been better if he had said ‘the salesman was likeable’.
    In so many cases the actual client contact was between an unauthorised salesman and the public as well as an authorised salesman. Very few who violate the trust between the client and the firm should be described as ‘advisers’.
    But get the unauthorised providers of ‘advice’ or scamming firms, authorised or unauthorised that cost the public dear.

  7. I think a lot of advisers are doing the sensible thing and working outside regulation in the same way the Internet/diect/CMC’s/ lead generation/none advised facilitators etc etc do without the burdon of regulation and due to the every increasing numbers the FSA is unable to stop them and if the FCA should happen to knock on their door they just shut up shop and start again using a different name. Have you noticed how often these companies Change their name?

  8. Fantastic, Now the FCA are goingto regulate the public. Think of all the fees they will be able to generate from 62 million people within the United Kingdom of Great Britain and Northern Ireland.

  9. Advisers are far too often hauled over the coals when customers develop selective amnesia regarding what they were informed of or not when provided with a financial product. Even worse is when this selective amnesia is encouraged by a CMC looking for some easy money.
    The FCA needs to be very clear about what advisers are required to do in order to be deemed ‘acting in the customers best interest’. Worringly the FSA and the FSCS start off assuming that the advice was wrong to begin with. The rise of the CMC is making this a particularly unfair stance.
    Possibly the introduction of a document stating the potential pitfalls of a financial product, issued to the client which is then signed to state they have read and understood the pitfalls would strengthen an IFA’s position when looking at a complaint. Just an option.

    @Peter Herd 1:15pm
    I agree that more has to be done about websites popping up offer some form of financial services at a knock down rate. I think the next few years is going to see a considerable rise in DIY services. This is only an issue for IFA’s if we are allowed to operate on a level playing field. If DIY services are monitered to make sure they do not cross the thin line into giving advice then good luck to them. It is part of an IFA’s job to promote the benefits of seeking advice. However, if this line becomes blurred and these DIY services start to cross the line into giving basic advice then something must be done.

    Just my humble opinion as always.

  10. after 40 years in the Industry without a personal complaint and working with 3rd generation clients and their investment that I have managed over the same time my clients have no biase, nope they trust me to ADVISE THEM as to what is best for them, occationally we get it wrong and more often we get it right. the bigest complaint from clients is that there is too much paperwork that they dont want and too many forms that they woukld rather not fill in and just signe them and send them back to me. they use a lawyer because he/she knows the law they use an IFA because he /she knows Financial services. The regulators MUST stop treating people like idiots…..and treating Idiots like people who in hindsight can make complaints because it costs them nothing to complain and the IFA has no right of appeal against a FOS decision.
    Still the FCA will not be around long, because like the PIA and the FSA they will have knowone to regulate ……the way they are shapping up.

  11. Someone should examinine “Regulator Bias”
    Especially Hindsight Bias, of which the FCA also accuse consumers.
    Then there is Banker Bias, where they regulate small insignificant brokers, rather than the big banks, who have the ability to bring the country to it’s knees.
    Will we now all have to take further exams in behavioural psychology?

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