Does the FCA understand human frailty?
07 May 2013
The Financial Conduct Authority’s (FCA) tenure has begun in earnest and its PR machine has been busy issuing statements and declarations of its objectives and areas it intends to target.
While much of its proclamations haven't strayed far from the usual platitudes - ‘bringing a human face to regulation', ‘a more pragmatic approach' - one of its first reports has raised something of a contentious issue.
In applying behavioural economics at the Financial Conduct Authority, the authors outline the regulator's aim to identify and stop sales tactics that exploit consumers' fears and biases by targeting firms and products that could be ‘taking advantage of known human frailties'.
Leaving aside the fact that increased and fine-tuned regulation has largely eradicated most of the advisers from the financial services industry who would look to take advantage of their clients, the new watchdog seems to be creating a rather subjective profile of what is in the best interests of the consumer.
After all, what defines a human frailty? If a consumer is scared of dying and leaving loved ones in debt, surely an adviser recommending and sourcing a suitable life insurance product is common sense as opposed to a preying on a supposed weakness.
Aside from the exploitation issue, the report does make interesting points about stopping companies taking advantage of customers through presenting add-on options as default. It found that consumers are twice as likely to take out policies if they are presented as the latter rather than being affirmatively asked to choose them.
There is certainly a time and place for selling cover alongside mortgage products, but brokers will have to be extra careful that any such sale is as transparent as possible and at the client's behest.
One area where I do agree with the FCA's recent pronouncements is that caveat emptor or ‘buyer beware' is no longer a valid mitigation in many circumstances.
When uninitiated consumers are buying complicated financial products, it is the duty of the adviser to explain the full range of outcomes and the adviser can't absolve themselves of responsibility and shift the blame to the consumer if the end result is not as expected. There still has to be a degree of duty from the client side, but advisers mustn't shirk their end of the bargain.
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