The Financial Conduct Authority has set out how it can learn from the mistakes consumers make when buying financial products to improve the way it regulates firms.
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 looks at a case study of how consumers can be encouraged to respond to customer redress letters.
In the first paper, the FCA says consumer biases such as 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.
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.
In the second paper, the FCA worked on a real case with an unnamed firm that was voluntarily writing to around 200,000 customers to offer redress due to a failure in its sales process.
The regulator found that varying the way the redress letter was formatted could improve the response rate from 1.5 per cent to 12 per cent, equivalent to an extra 20,000 people responding to the letter.
The changes included making bullet points more relevant, stripping out text and explaining the claims process would only take five minutes.
The FCA says it will use insights on behaviour to develop policy, analyse firms’ business models and build evidence for enforcement cases.
Aurora Financial Planning chartered financial planner Aj Somal says: “This kind of outside the box thinking is refreshing, particularly as it is coming from the regulator.”