If you’re working in financial services, you should have heard of behavioural economics. But have you read all the Financial Conduct Authority’s (FCA’s) Occasional Papers on the subject? Possibly not.
What has the FCA published to date?
Since 2013, the FCA has written ten Occasional Papers on behavioural economics and the psychological heuristics which affect financial decision-making. The main learnings from Occasional Paper 1: ‘Applying behavioural economics at the Financial Conduct Authority’ can be found within our Financial Services SlideShare. But five other Occasional Papers are also worth knowing about.
5 Financial Services studies by the FCA
These five Occasional Papers explore the impact of specific communications variables on consumer decisions; with some using the “gold standard” of randomised control trials (RCTs). While the examples are useful from a compliance perspective, they also bring to life the practical benefits of using scientific, data-driven methods. Experimentation enables firms to both deliver and demonstrate their commitment to positive customer outcomes – optimising experiences and boosting customer satisfaction and loyalty. Here is our quick summary of these key FCA studies!
Occasional Paper 2
Topic: An RCT looking at how to encourage customers to obtain redress following the mis-selling of financial products or services.
Findings: Small changes to the content of the redress letter had a significant increase in the number of customers responding. Changes included reducing the amount of copy stating that the claims process would only take five minutes and presenting information in salient bullet points. The most effective change was the salient bullets, increasing the response rate by over seven times.
Key Takeaway: Avoid the ‘Curse of Knowledge’ bias! In order to ensure customers act on important financial communications, it’s important that messages are digestible and designed to match customer understanding! Simplify the format and wording of all communications!
Occasional Paper 3
Topic: Using experimental methods to investigate whether the inherent structure of transactions – i.e. where insurance is offered as an add-on – impacts consumer decision-making.
Findings: The nature of the transaction and how insurance is sold had a major impact on consumer behaviour. Whether insurance was offered as a stand-alone product, advertised alongside a primary product, or drip-fed during the purchase of the primary product, made a huge difference to whether consumers decided to shop around and their ability to do this effectively.
Key Takeaway: To ensure positive purchasing outcomes, the steps involved in selling financial products should be monitored and assessed for behavioural considerations. Examine the choice architecture of your customer journey!
Occasional Paper 7
Topic: Encouraging customers to take advantage of higher interest rates by switching savings accounts.
Findings: Relatively minor changes to the timing and messaging of reminder communications can mitigate the effects of behavioural biases (i.e. limited attention, loss aversion, present bias) and encourage positive customer behaviour. For example:
- Sending reminders about interest rate changes increased switching by at least 8%
- Reminders that emphasised cash loss were slightly more effective than cash gain
Surprisingly, customers issued with a reminder before a change in interest rate were more likely to move their money elsewhere – i.e. to a different company. Customers receiving reminders after a decrease in interest rate were more likely to switch accounts within the same bank.
Key Takeaway: Enabling customers to make positive choices about their savings will improve their relationship with organisations in the long run. Although the content of messaging impacted account switching behaviour, timing had a big influence. Firms should aim to improve both elements in order to facilitate good customer outcomes.
Occasional Paper 9
Topic: With increasing financial product complexity over the past few decades, there is little evidence of any increase in consumer capability. This paper describes the results of a survey looking at how well consumers understand and value a class of complex products, specifically structured deposits.
Findings: Retail investors significantly overestimated the expected returns of all variants of structured deposits, even in the simplest form, by around 1.9 percentage points per year.
- They appeared to value structured deposits almost as if they were risk-free.
- Providing information only made a limited difference to retail investors’ valuations and depended on the nature of the information provided:
- “Scenarios Disclosure” – i.e. giving investors information on possible hypothetical scenarios – had little effect.
- “Quantitative model returns” – i.e. giving investors likely product returns based on quantitative modelling – induced a .41% point larger devaluation.
Structured deposits appear to exploit customer’s biases, lead them to have unrealistically high expectations of returns, and impede their ability to meaningfully evaluate and compare various structured products and alternatives.
To support positive customer behaviours, FS companies should consider:
- Using only advised sales channels to sell complicated products.
- Disclosing costs as a separate fee, rather than deducting from the investment amount or building into the product design.
- Improving information disclosure to mitigate high expectations of returns.
Occasional Paper 10
Topic: Understanding the impact of annual summaries, text alerts and mobile banking apps on customer behaviour, in the context of overdrafts, balances and switching current accounts.
Findings: Looking at over 300 million observations from one bank, and aggregated data from another, they found:
- Annual Summaries had no effect on customer behaviour in the personal current account market.
- Text Alerts and Mobile Banking Apps both reduce rates of unarranged overdraft charges, probably due to the timely nature of the information and the facility to act. There was an additional effect if services were used together. Interestingly, these facilities also seemed to lead to a decrease in average current account balances.
Key Takeaway: While annual summaries do little to alter customer behaviour, text alerts and mobile banking enable greater flexibility and can benefit customers by making it easier to avoid overdraft charges. Firms could consider expanding annual summaries to provide supportive advice, such as financial planning suggestions or savings tips – perhaps segmenting consumers identified as having particular difficulty managing their finances.
Inspired by the FCA to start applying behavioural economics?
Read how we helped Wesleyan Financial Services to increase annual financial review bookings by 69%.
Consider a bespoke workshop on applied behavioural economics for your team.
Visit our financial services page to learn more how Prime Decision supports FS organisations.