Today the newly created British Financial Conduct Authority (FCA) announced that it will incorporate insights form behavioural economics in its regulatory work. Behavioural insights should assist the regulator to better understand the mistakes consumers make in financial services, how firms respond to these mistakes, how this affects competition, and what interventions the FCA might consider.
Furthermore, the FCA published two occasional papers. The first one focuses on how consumers choose and use financial products, and how behavioural biases can lead firms competing in ways that are not in the interest of consumers. The second paper explores how best to encourage consumers to respond to customer contact letters.
In a speech at the London School of Economics Martin Wheatley, FCA chief executive, summarises the key challenges facing the financial services industry. He highlights inter alia:
“One of the most significant challenges for modern financial regulators and financial services alike is to recognize that we operate within a very human environment. A fallible world – not just of ratios and complex models but also responses, sometimes flawed, that behavioural economics helps us to understand.”
“‘Buyers beware’ becomes hard to defend when unsophisticated customers are buying seriously complicated financial products, where the risk of failure is far more dangerous than a decision in the supermarket to buy three bananas instead of one.”
“I want the FCA to bring a more human face to the regulation of financial services; a more pragmatic approach to regulation.”
“It’s also worth pointing out that behavioural economics is not enough, on its own, to guarantee good regulation or strong financial products. It is a part only of the new FCA’s identity.”
Further information: http://www.fca.org.uk/news/fca-publishes-occasional-papers-on-behavioural-economics
The occasional papers can be found at: http://www.fca.org.uk/your-fca/documents/occasional-papers/occasional-paper-1 and http://www.fca.org.uk/your-fca/documents/occasional-papers/occasional-paper-2