OPINION13 October 2022

Using behavioural science to better understand value

Behavioural science Finance Opinion UK

The Financial Conduct Authority has released new regulations on how behavioural science should be applied to consumer finance. Leigh Caldwell looks at the proposals.

People attracted by magnet

The Financial Conduct Authority (FCA) are big fans of behavioural science. They’ve been experimenting with behavioural methods in their own research over the past nine years. Their work on the effect of nudges in helping consumers pay down credit card debt, and the effectiveness of risk warnings has clearly made a big impact in the organisation, because they recently announced new regulations a huge sector-wide application of behavioural research in consumer finance. 

The regulations introduce a new principle – firms must act to deliver good outcomes for retail customers. It is no longer good enough to say “we acted correctly”; organisations need to show that customers get the outcomes they should get. The FCA wants to make sure that products and services meet a genuine customer need; prices are clear, reasonable and offer fair value; that consumers fully understand what they are agreeing to; and that customers are supported through the lifecycle of the product to ensure they receive all the promised benefits. We believe this is a positive change in the financial sector: a shift from using behavioural economics for extracting value to adding value, and there is no better way to understand perceptions of value than using behavioural science.

The FCA are looking to build an understanding of behavioural science into the day-to-day business of the retail financial sector; this means that firms are being requested to actively use a behavioural economics approach to test all products and customer communications. This means that all consumer financial brands will need to publish their behavioural testing plan by the end of October this year, and complete their testing in 2023. 

These new regulations signal the first time a regulatory body has advocated using behavioural science as a sector-wide approach to consumer testing. For the finance brand-side research and compliance teams, particularly those that aren’t lucky enough to have their own in-house behavioural team, it may feel you have a challenging month ahead, as you get to grips with research methodologies you may not currently be familiar with. 

How should you be testing for biases, value, and comprehension? 

Testing for biases
The new regulations need you to test for both the intentional biases, such as Goldilocks effect and hyperbolic discounting, and unintentional biases such as the Ikea effect or sunk cost fallacy.  Each bias can show up in a different way, and may need its own form of test.

We recommend starting with an expert review, where your products and communications are checked by a trained behavioural scientist against the 12 key biases. They are likely to spot high-risk areas where consumers might be influenced towards undesired outcomes. This review may highlight specific areas for testing, with a research approach tailored to the biases that were identified.

Testing for value
The FCA requires your products to meet genuine consumer needs. But what are those needs? Customers are not always able to articulate their real needs, especially in an area like finance where customer expertise is limited.

A research approach can be designed to uncover true value, to determine actual customer needs and measure how strong they are, and look in different ways at the consumer’s unconscious mind to find out what they truly want.

Testing for comprehension
A specific type of test is suggested in the FCA guidance: the comprehension test. In this form of research, respondents are presented with the same information that is shown to buyers of your products. After they have time to look at it, an optional ‘distraction task’ is applied, to take their mind elsewhere. A series of questions is then asked, to determine how much they understood and recalled.

Testing for support
The support outcome relies on two kinds of research:

  • Customer journey review
  • Ongoing, longer-term testing during the lifecycle of a product.

The customer journey review can be carried out as a desk review; we recommend again that this be done by a behavioural scientist who can look out for specific issues and potential biases in the delivery process.

The longer-term testing can combine mystery shopping and customer interviews to check that outcomes are being delivered throughout the product lifecycle, for example during the claims process for an insurance product or at maturity of an investment product.

The FCA are looking for finance firms to have their board sign off a compliance and testing plan by the end of October 2022. However, for many brands this work is still on the to-do list. Research resources and consumer panels will start to be booked up, so we recommend engaging research and testing suppliers soon.

The FCA regulations can be viewed here

Leigh Caldwell is partner at The Irrational Agency