Published by Scott Eason on
Chefs will tell you plates look better when there are an odd number of items, particularly three and it seems the FCA is following this recipe for success too.
There are three stages to the process, used by the FCA, to protect consumers:
The FCA use indicators to identify consumer detriment caused by biases, including checking for any mismatch between the products’ declared purpose and its actual use by consumers. Part of this is to understand how consumer biases affect their decisions and how firms respond. These indicators can help by giving the FCA warning signs that something may be array. For example, high profits on an add-on product or in particular market niches, especially if they are derived from consumers with relatively weaker financial knowledge.
Another indicator is concentrated customer dissatisfaction but this tends to be a lagging indicator. In order help to spot problems before there is widespread dissatisfaction the FCA are using the science behind BE to help them. Again the FCA has split these into three categories:
Having identified a possible problem the FCA needs to prioritise it for further investigation, among the rest of its work. That means assessing the size of the issue, most likely in monetary terms but care is needed where certain niches are disadvantaged while others make hay. Here the net/aggregate market detriment is not necessarily the best measure.
After identifying and prioritising incidents of consumer detriment caused by behavioural biases the FCA has to understand what the root cause of these incidents is.
To do this they brainstorm potential reasons, including whether consumers may in fact be acting rationally. Then look at each in turn in order to rule out unlikely reasons. Hopefully this will leave one or two realistic explanations that they can investigate.
They look at what biases may be at play by considering how consumers act in different settings, their awareness of key product features and disparities between their stated objectives and benefits of the product. This in turn forms the basis of any further evidence they need to collect, including dialog with firms involved.
The FCA has a wide range of possible measures it can choose from in the hope of rectifying the imbalance in the market in questions – from providing information right through to banning products.
Having mentioned all these various options it was clear in a number of places in the paper that the FCA like ‘nudges’. That is small well targeted prompts that are cheap to use and unlikely to be seen as overly-interventionist. These are likely to be information that says to consumers ‘if it looks too good to be true, it probably is!’ Given the FCA is answerable to a government that is firmly in the free-market camp, this isn’t unexpected.
The FCA, like most organisations, has to justify itself and, like most not-for-profit organisations, that’s easier said than done! They use various quantitative and qualitative measures to estimate the impact of their actions but clearly just having a financial watchdog helps. Beyond that, thought-leadership like the use of BE is further evidence of the value of the FCA.
If I have one criticism of the paper it was the feeling of ‘oh my God!’ I suffered when I picked up a 71 page document off the printer. That said it was well written.
BE very definitely has a place in financial regulation and it seems the FCA have fully embraced this, which can only be good for consumers. It will be interesting to see what further tools they add to their kit and indeed examples of how they use BE. Perhaps in the longer term we may see the FCA using BE to pre-empt consumer detriment and prevent it from happening in the first place.