OpinionAug 8 2013

Clear message from behavioural economics

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In Journey to the FCA, the City regulator’s regulatory philosophy was discussed which involves an approach that is forward looking, anticipating problems before they arise and adopting a more innovative way of dealing with problems and using tools that have not historically been used by regulators.

One such example is the use of behavioural economics which the FCA is using to help it understand how consumers make certain financial decisions, what drives companies’ behaviour, and how this affects competition.

The intention of the FCA’s chief executive, Martin Wheatley, is to bring a more human face to the regulation of financial services; a more pragmatic approach to regulation.

This means not only dealing with sharp practice but also encouraging better decision making among firms. In April this year the FCA published two Occasional Papers; the first on behavioural economics and the second covering how to encourage consumers who may be due redress to respond to a firm’s letter.

The results in this second Occasional Paper were based on a redress exercise voluntarily undertaken by a firm which was at the time under FSA supervision. It wrote to approximately 200,000 former customers to address past inadequacies.

The letters asked those who felt they had been misled when sold their product to call the firm’s helpline to discuss the sale. Working in partnership with the firm, the FSA used this mass communication exercise to run a randomised controlled trial.

The FSA trialled seven different treatments, these were:

• Envelope – adding a message to “act quickly” to a plain envelope.

• FSA logo – using the FSA logo in the letterhead.

• Salient bullets – replacing the two bullet points at the top of the letter with more salient bullet points.

• Simplified – making the body of the letter simpler and more concise, by reducing the text by 40 per cent.

• Claims process – including a sentence in bold explaining that the claims process would only take five minutes.

• Chief executive’s signature – using the firm’s chief executive signature to sign the letter, instead of a generic “customer team”.

• Reminder – sending a second letter three to six weeks after the first. Reminder letters were identical to the original letter the customer received; apart from a message at the start of the letter stating that this was a reminder letter.

The FSA found that salient bullets had the biggest positive effect followed by simplified and then the claims process.

To put these effects into tangible terms, applying these three treatments across the entire sample would increase response rates by 7500, 2800 and 2700 respectively. The impact of salient bullets and simplified perhaps highlight the importance of presenting information clearly and succinctly to help the consumer to quickly read and understand that a decision is required. The positive impact of the claims process supports thinking that consumers need reassurance that making a claim will be quick and easy.

The chief executive’s signature decreased response rates and the research was unable to provide a clear reason for this. One line of thinking was that the chief executive’s signature was disingenuous on the basis that he/she was not personally involved, reducing the letter’s credibility. The FSA logo had no impact and the envelope had only a minor positive effect.

The FSA found that overall the use of reminder letters indicates that they are a meaningful way of increasing response rates. In addition, the timing of the letter has important ramifications. Among those who did not respond to the initial letter after three weeks, the FSA found that an additional week’s delay in sending the letter reduced response rates.

While behavioural economics is not a straightforward discipline, there are some obvious lessons to be learnt, in particular that subtle changes to the presentation of information can have meaningful effects and tailoring letters to improve their clarity is the most effective method to increase responses.

Simon Lovegrove is a lawyer with the financial services team for law firm Norton Rose Fulbright