Regulation  

Risk warnings may push consumers to unsuitable products

Risk warnings may push consumers to unsuitable products

Risk warnings may make consumers less likely to understand the details of a product and more likely to choose an unsuitable one, according to a study published by the Financial Conduct Authority.

The 88-page 'Occasional Paper 47' focused on whether including risk warnings on social media posts for 10 commonly advertised financial products, such as car insurance and payday loans, were effective.

The results found when risk warnings were included in social media posts such as tweets rather than only on the product webpage, consumers were less likely to shop around and understand the risks, and were ultimately more likely to choose an unsuitable product.

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The study said: "One explanation is that the presence of risk warnings in social media posts makes products less appealing to participants, meaning they are less likely to explore a product and consider fewer alternatives.

"Because they click on these adverts less, they are less likely to read the webpage text. In turn, this makes them less likely to get the information necessary to understand the product, buy it or choose a suitable alternative."

The paper also speculated that standardised risk warnings made all products sound similar, making it harder to distinguish between products with higher and lower risk levels.

The research also found improving the readability of webpages, but not tweets, had a modest effect on comprehension and pictures increased preference for products even if they were displayed within the risk warning.

This suggested pictures might not be the most effective way to encourage consumers to take heed of risks.

The research was published by the FCA in collaboration with the University of Bath and Warwick Business School.

Occasional papers are commissioned to encourage debate on financial regulation and to create evidence to support the FCA's decision-making.

The regulator said the findings did not necessarily represent its position, but would be used to inform its views.

damian.fantato@ft.com