Collectively the UK public is overpaying for mobile phone contracts by £355 million a year while in the energy market millions of households could save over £300 by switching supplier. Similarly, estimates suggest that up to 80% of consumers are missing out on the best deal for their annuity (Wells, 2014), costing consumers between an estimated £230 million and £1 billion a year in terms of lost lifetime income. Taken together these statistics present compelling evidence that markets are not delivering the best outcomes for consumers. The justification for regulatory intervention and the core role of regulators is to correct market failures and the consumer detriment arising from those failures. One explanation for why a traditional regulatory approach has not provided a complete solution in these situations is because it is underpinned by the belief that consumers act in a perfectly economically rational way, when it is clear that this is not the case.
Regulators should be designing remedies with behavioural market failures at the forefront of their thinking, to help consumers make better choices for themselves and prevent businesses from exploiting their behavioural biases. In this sense, regulators’ primary purpose should be to facilitate markets working well by shaping remedies, testing and iterating to create the best outcomes for consumers. This is not about removing choice but instead making sure that consumers are able to make choices better in line with their true preferences. Pursuing this approach will also support and complement other regulatory goals, including minimizing regulatory burden, supporting competition and ensuring reliable, sustainable markets.
This report is structured as follows:
- Section 1 sets out the traditional justification for regulatory design, and makes the case to redefine this to reflect behavioural market failures.
- Section 2 details ways in which consumers’ decision making systematically deviates from what would be expected from a 'rational actor' in regulated markets (i.e. energy, telecoms, personal finance and pensions) by describing eight behavioural biases and explaining how they influence consumer behaviour within regulated markets. This section also briefly assesses examples of current regulatory approaches to address these biases, and concludes that a more systematic and deliberate approach is needed.
- Section 3 puts forward a new vision for the consumer market regulation focussing on the following four key areas: criteria for what a well-functioning market looks like from a consumer perspective, data evaluation to see whether the market is performing on a 'well functioning' scale and identifying behavioural market failures, designing remedies to overcome behavioural market failures and testing if the remedies are actually leading to better outcomes for consumers.
- Section 4 concludes by offering recommendations for how Citizens Advice can advocate for and develop this new vision with regulatory partners, as well as directly with consumers.
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