In 2013 the Financial Conduct Authority published its first occasional paper on behavioural economics, analysing how real people make real decisions.
The original 2013 conclusions might not have been entirely groundbreaking to those advising or selling to consumers on a daily basis, but this was sort of the point.
In adopting behavioural science, the FCA was playing catch up with the practical realities of the markets it regulates – but it is not playing catch up any more.
Regulation is changing fast as the regulator deploys advanced behavioural tools and frameworks to protect consumers from harm. The consumer duty would be almost unthinkable without advances in behavioural science.
Prudent firms have been proactive in assessing their own compliance with the duty, trying to see their business through the regulator’s eyes. Without the behavioural science lens, these assessments are largely futile.
The FCA uses behavioural science to assess the design of customer communications, the suitability of distribution, the fairness of pricing, and the effectiveness of customer support.
Evidence that you have similarly used behavioural science is evidence that you have embedded the consumer duty.
With behavioural science, more harm is ‘foreseeable’
Our decisions are affected by our cognitive limitations. We do not have brains the size of small planets. Our mental effort is a scarce resource, to be rationed carefully.
Thankfully, we have excellent ways of making decisions quickly and efficiently, with emotional responses and rules of thumb that draw on the information in front of us.
Indeed, our decisions depend on the way in which choices are framed – this is known as the ‘choice architecture’. The Competition and Markets Authority explains that choice architecture includes the way the choice is structured, information about the choice, and any pressure to make a choice.
One of the key implications of behavioural science is that there is no such thing as neutral choice architecture.
Embedding behavioural science is evidence that you have embedded the consumer duty.No matter how you present information to your customers, you are influencing their decisions. We cannot present information with context, from the design of suitability reports to the way that advisers structure conversations.
The influence of the choice architecture is increasingly foreseeable, meaning that more harm is foreseeable.
For example, consider a change to the way that risk is presented as a customer thinks about investing some of their savings. We can predict how that change will affect both the average customer and different customer groups.
The FCA has access to the latest behavioural science research, it could judge that quite a lot of harms were foreseeable.
In regulatory circles, an element of the choice architecture that leads to poor consumer outcomes is known as a ‘sludge’ or ‘deceptive pattern’. Have you audited your choice architecture for these?
Assessing friction in the online choice architecture
Small tweaks to websites and apps can have large ramifications, given that consumer attention is typically more limited in an online environment.
It is helpful to think about the level of ‘friction’ in your online choice architecture. More friction to choose a particular option – such as extra screens, scrolls, or clicks – reduces the likelihood of the consumer choosing that option.
Does your choice architecture have low enough friction to encourage decisions that lead to good outcomes? For example, is it too hard for consumers to transfer their funds to another provider?
Does your choice architecture have high enough friction to discourage decisions that lead to poor outcomes? For example, is it too easy for consumers to invest in high-risk assets?
As the FCA puts it: “Firms should consider whether they need to build positive frictions into their processes to deliver good outcomes.”
Embedding behavioural science in your organisation
Embedding behavioural science is evidence that you have embedded the consumer duty. We have seen that it is feasible for large and small organisations.
Behavioural science is intuitive. It is not hard to up-skill your team on core concepts, through training or simply reading accessible books like Misbehaving: The Making of Behavioural Economics by Richard Thaler.
Build on this by reading the FCA’s research papers and blogs on applying behavioural insights to your sector.
Behavioural science is practical. Audit your choice architecture for sludges or deceptive patterns and assess whether it has the right level of friction.
Behavioural science is empirical. Test your choice architecture by varying it and observing how it does or does not change consumer decisions and outcomes.
Tim Hogg is a director at Fairer Finance
