The Financial Conduct Authority has warned firms that suggesting consumers are ultimately responsible for making poor decisions has its limitations and firms should not be falling back on ‘buyer beware’ as a defense, saying the principle of caveat emptor is “hard to defend”.
The FCA has published two occasional papers on behavioural economics to explore how people make financial decisions, including one on the general application on the techniques at the regulator and another on encouraging consumers to claim redress.
In a speech that Martin Wheatley, FCA chief executive, will give later today (10 April), the chief executive of the new regulator outlines the challenges facing the industry, saying the parallels between financial services and other markets are limited.
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 that many investors simply will not ask because they are humans, not automatons.”
Mr Wheatley will also outline his vision for how behavioural economics will be used by the FCA, and how he hopes firms will act in future.
He will say: “I want the FCA to bring a more human face to the regulation of financial services; a more pragmatic approach to regulation. Not only to defend against sharp practice but also to encourage better decision making among consumers.
“The best financial service companies, the most consumer-focused, go to considerable pains to make sure their customers are steered towards the best products and the most suitable. We should applaud these firms and learn from them.”
Mr Wheatley believes that a better understanding of how customers make decisions will also improve competition.
He will say: “The FCA wants to make sure customers are far more easily able to compare product prices and to assess their value.
“We want the regulatory system to use behavioural economics to ascertain whether people are being put off switching products through inertia, inattention or even the simple fear of regret from making a wrong decision.”
“[But] 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’s also worth pointing out that 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.”
