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.”