Consumers tend to place too much weight on past performance when assessing funds, even if they are warned that it is unrelated to future returns, a 50-page report produced by Oxera for the Financial Conduct Authority has revealed.
As well as revealing the pointlessness of “past returns are no indication of future returns” warnings, the report - which was completed by Oxera in October 2014 but only made public by the regulator today (25 June) - also found further failures of disclosure requirements.
Consumers tend to be subject to a variety of behavioural biases - such as availability and optimism bias - which cause them to ignore pertinent information and wrongly assess risk.
For example, Oxera said people tend to overestimate the likelihood of outcomes that are particularly memorable, highly emotional or have happened recently. Behavioural biases may also lead consumers to ignore charges that may be incurred during the use of a product (for example, overdraft charges).
In such cases, disclosure at the point of sale may not be sufficient to avoid such outcomes, Oxera warned, since consumers tend to forget about these charges. A more effective strategy would be for providers and advisers to disclose the relevant information at the point where they may be incurred or provide frequent reminders.
Oxera gave as an example that certain mobile phone providers in the UK (for example, giffgaff) have a screen message following each call, which tells the consumer the duration of the call and the remaining balance.
The report also noted that the fact the most commonly used number format in financial services products is the percentage. However, despite its ubiquity, Oxera explained that the percentage is not universally understood by consumers.
Furthermore, the overall cost of return of a product may depend on the compounding of regular percentage amounts, potentially adding more complexity.
Several studies have shown that showing charges and fees in absolute terms, rather than percentages, helps consumers to better understand the product features, particularly for the financially illiterate.
The report stated there have been several successful policy initiatives to help consumers deal with their lack of understanding of percentages. In certain markets, the regulator requires charges to be displayed both in percentages and absolute terms.
The regulator also came under fire for initiatives that have largely centered on disclosure of product features. However, Oxera found the total cost and benefit of a particular product depends on the product attributes and costs, as well as the overall usage of the product.
emma.hughes@ft.com
