Behavioural Science is key to Consumer Duty compliance

The FCA’s new Consumer Duty comes into force this summer and promises to deliver one of the biggest shifts in conduct regulation seen by the financial services industry for over a decade.

A new paper from Capco, the global management and technology consultancy, argues that Behavioural Science (how and why people make decisions) can play an important role in informing firms’ preparations for the new Duty.

The Duty requires firms to protect customers from cognitive biases (i.e. mental shortcuts that are not based in reason and therefore not always correct) that may cause them to make purchasing decisions that are not in their best interest. Additionally, firms are expected  to understand and evidence whether the Duty’s outcomes are being met. 

While acknowledging that consumers are ultimately responsible for their own decisions or actions, the Duty effectively obliges firms to protect customers from the cognitive biases that may cause them to make decisions that are not in their own best interests.

The Duty’s four outcomes relate to (1) products & services, (2) price & value, (3) consumer understanding, and (4) customer support. Capco’s paper outlines how Behavioural Science can support their successful implementation by providing key behavioural insights into how consumers make purchasing decisions to effectively design and deliver customised and ethical behavioural interventions that help protect consumers from potential risks associated with certain products or services:

1.    Products and Services

Firms are required to ensure all products and services are fit for purpose, for a defined target market, and distributed appropriately. An understanding of the ‘affect heuristic’ and ‘limited attention bias’ can support this outcome by clarifying how consumers make decisions when purchasing products or services.

2.    Price and Value

Firms must ensure that the price the customer pays for a product or service is reasonable relative to the overall benefits. This is not just in respect of monetary value (price) but also about value for money (benefits). An understanding of ‘loss aversion’ and the ‘decoy effect’ can support this outcome by identifying what factors influence consumers’ perceptions around price and value for money.

3.    Consumer Understanding

This outcome requires that all communications enable customers to clearly understand products and services on offer, their features and risks, and the full implications of any decisions they take. An understanding of ‘salience bias’ and the ‘anchoring effect’ can support this outcome by identifying areas where there is a lack of knowledge or confusion which must be addressed. 

4.    Consumer Support

The Duty requires that firms provide support to customers across the lifecycle of a product and customer relationship. In addition, businesses should strive to provide clear terms of service and accurate information about their products. An understanding of ‘inertia’ and ‘confirmation bias’ can support this outcome by illuminating consumers’ needs and motivations and providing evidence-based solutions to address them.

Martha Ferez, Managing Principal at Capco and co-author of the paper, said: “The Consumer Duty is fast approaching and firms need to be in a position to fully integrate the regulatory changes into their processes, products and services. Behavioural Science is key to helping firms prepare for these changes, and behavioural insights can be used to inform the design of. tailored and ethical behavioural interventions that can provide the necessary controls to ensure consumers have good outcomes.”