Applying Behavioral Economics at the Financial Conduct Authority

This paper summarizes the main lessons from behavioral economics for retail finance markets and discusses how behavioral economics can be used in the regulation of financial conduct. It analyzes how consumers make mistakes when choosing and using financial products and how firms respond to these mistakes. It also discusses how behavioral biases can lead firms to compete in ways that are not in the interests of consumers. The paper focuses on consumer protection in retail financial markets where people are susceptible to biases. It states that behavioral insights can be used for creating efficient retail financial markets by helping regulators create policy rules and guidance, analyze firms’ business models, behavior, and products, build evidence for enforcement cases, and shape communication among regulators, providers, and consumers. The paper covers the following sections in detail:

• Introduction to behavioral economics with a focus on its advantages for regulatory authorities;
• Lessons from behavioral economics;
• Discussion on how people make decisions;
• Biases and consumer behavior in retail financial markets;
• Biases, firm behavior, competition, and traditional market failures;
• Applying behavioral economics for regulation;
• Identifying and prioritizing risks to consumers;
• Understanding the root causes of problems and designing efficient interventions.