Behavioural economics is becoming a “game changer” for regulation, says FCA chief executive Martin Wheatley.
In a speech at the Australian Securities and Investments Commission, Wheatley said the FCA is investigating whether behavioural economics can offer it insight into how individuals within organisations respond to regulation.
The regulator is also using behavioural economics to encourage firms to compete on price and product quality, he said.
Wheatley said: “There is now little doubt behavioural economics could have a profound impact on many of the most serious challenges facing policymakers today.
“From the FCA perspective, we are already seeing significant possibilities across a range of UK markets like cash savings, general insurance and retirement income.
“But there is also opportunity here for behavioural economics to support more specific issues like complexity, consumer inertia, marketing and the impact of firm communications to consumers.”
Wheatley gave the example of using behavioural economic ‘nudges’ to encourage higher response rates from consumers to misselling redress programmes.
But he cautioned that human behaviour and nudges are “a notoriously complex equation” and that behavioural economics is therefore not a silver bullet nor a “like-for-like replacement for traditional regulation”.
Wheatley added: “Firms should be under no illusions as to how serious we are about breaking the link between poor products and high financial reward.
“Competition will be king as we move forward. And that means tomorrow is unlikely to look like today.”