The use of behavioural science could support the successful implementation of the regulator's key outcomes for consumer duty, according to research by Capco.
Capco’s research, ‘Behavioural Science: A Key Ingredient In Your Consumer Duty Strategy’, stated that, ahead of the implementation of consumer duty at the end of July, understanding behavioural science can help to deliver the duty's outcomes of products and services, price and value, consumer understanding, and customer support.
The whitepaper showed that a number of biases may affect consumer’s judgement and thus impede the deliverance of the consumer duty's outcomes, but that identifying these biases could be helpful.
One bias that the research claimed could be an obstacle to ensuring all products and services are distributed appropriately was "limited attention bias" which, Capco explained, is when a consumer sees an advertisement for a product and only remembers the most attention grabbing details, such as the price or a familiar brand.
Capco claimed that this could lead to a consumer not noticing or considering other important information, such as fee information buried in the small print, and accordingly make their decision based on incomplete knowledge.
The research also suggested that this science could be extended to the price and value outcome and be used to highlight consumers’ cognitive biases when assessing the price and the perceived value of products and services.
In this area loss aversion bias was highlighted as something that could lead to consumers placing a greater importance on the impact of losses over potential gains.
"Even if a pricing structure is positioned with equal focus on the costs and the features, the customer will place more importance on the lost money rather than on the gained benefits", the research warned.
One further example of an impeding cognitive bias was confirmation bias which was identified as being potentially problematic for delivering consumer support.
The research detailed that this bias could mean that a customer assumes that their personal information is secure because the company has stated they have strong security measures in place.
But, because the customer believes that the information is secure, they may ignore any reports or warnings about potential vulnerabilities that are inconsistent with their beliefs, even though this could put their data at risk.
Solutions
To avoid these biases and help with the success of the consumer duty, Capco suggested that “nudges” could be used to "alter the environment in which someone makes a decision" in order to influence behaviour "without taking away an individual’s freedom of choice".
Examples of nudges provided by Capco included screen pop ups, automated reminders or notifications, and issuing communications that are short and to the point.
However, Capco cautioned that the ethics of nudges are "key" within the financial ecosystem and that they should respect freedom of choice and not remove options or significantly change economic incentives.
