The Financial Conduct Authority (FCA) is keen to use behavioural economics in the way it regulates. But what does this mean in practice? Laura Miller finds out.
The Financial Conduct Authority (FCA) last week published an ‘occasional’ paper describing how behavioural economics can help it understand and solve problems in retail financial markets more effectively.
Behavioural economics uses insights from psychology to explain why people behave the way they do.
The crux of the thinking is that people do not always make choices in a rational and calculated way. In fact, most human decision-making uses thought processes that are intuitive and automatic rather than deliberative and controlled.
Why the FCA wants to know what goes through our heads when we buy a financial product
The FCA wants to help consumers overcome these behavioural problems when it comes to finance. So what new perspectives on interventions do behavioural economics offer the FCA?
In its regulation, the FCA is looking to implement two complementary approaches to identifying behavioural risks.
One is looking for specific indicators of likely consumer mistakes. The other is checking for a mismatch between a product’s declared function and consumers’ actual use.
Drilling down into the paper reveals four ways in which the FCA believes it could solve consumers’ behavioural problems.
The first is to provide information. This would mean the FCA requiring firms to provide information in a specific way or banning specific marketing materials or practices, such as the proposed ban on the marketing – or selling – of unregulated collective investment schemes (UCIS) to retail investors.
Many advisers already give clients a range of potential investment, pension or life cover scenarios to choose from as part of their processes, but take note – this is an area the FCA is looking into.
Third involves controlling product distribution, by requiring products to be promoted or sold only through particular channels or only to certain types of clients (see above on UCIS).
Next is to change the ‘choice environment’. This would mean adjusting how choices are presented to consumers.
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