Fairer Finance Director: Why BeSci is essential to consumer duty

Tim Hogg recently joined research and ratings agency Fairer Finance as a Director to head up its behavioural science practice. In this interview he explains why BeSci is so core to consumer duty and how firms can make a start in implementing it.

FSF: What is the relevance of behavioural science to Fairer Finance and what will you be doing there in your role?

Behavioural science tells us that we all have cognitive limitations, which sounds a bit harsh, but basically means that we don’t have brains the size of small planets. We have to ration our mental effort carefully because we’ve only got so much time.

When you renew your insurance for your home or your car, you’ve only got so much mental effort that day or that week and you’re only going to put so much of it into renewing the insurance. We have limited time as well.

That means that we make quite different decisions to how traditional economics and traditional regulation might have assumed that we make decisions. We make decisions in a hurry with limited cognitive resources, and we’re making decisions that we might live to regret or might not be the best decisions for us.

Fairer Finance is helping companies design better communications to really engage with and inform customers and help the customers make the best decisions for them.

Economists used to use the model of “homo economicus”, which argued that human beings essentially make rational decisions. Have those assumptions changed?

The traditional neoclassical view of economics has been widely discredited. When you talk to a regulator in the UK, in any sector really, the notion that people are making optimal decisions has just completely gone out the window.

The last 50 years have seen a massive change, especially in financial services. The FCA has really led the way in adopting behavioural science and in terms of how regulation is designed, we’re very much now applying what we know from behavioural economics.

If you were to separately look at academic economists in their ivory towers, you might find a surprisingly large number of them still assuming homo economicus and being very sceptical of behavioural side of things.

A lot of it is because the behavioural side of things makes the maths more complicated. If you’ve built your career and if all your core insights are based on doing the maths of the modelling, it can be quite hard to that incorporate behavioural economics without undermining previous results or just making it a lot harder to calculate.

How integral is behavioural science specifically to consumer duty and what are some practical applications?

Without behavioural science, the consumer duty would not happen. It is the core intellectual underpinning. The consumer duty is all about treating customers well and getting good outcomes for customers despite the way that customers make decisions and behave.

It’s radically changing the framework within which firms sell products to one which accepts that people are making decisions behaviourally rather than fully rationally.

One example would be thinking about customer understanding, which is a core part of consumer duty. The focus on that is because we know that people are skim reading terms and conditions, even summary documents, because they may struggle with the long sentences and the technical jargon.

We also know people read pages differently online or offline. So it’s all about applying that knowledge and communicating more effectively with customers.

The words “behavioural” and “science” don’t appear that many times in the FCA’s policy documents, for example, but it’s very clear that they’ve been using it.

What are some examples of how this works?

I think it’s about making sure that the really important information is not in a PDF document but is brought out so that people can understand the core things they need to understand without needing to read hundreds of pages.

It’s about communicating with people where they are. Ts and Cs are really important and often people will come to them when something goes wrong or when they need to make a claim on their insurance. You can use behavioural science so it’s really easy to navigate and then understand the text. If the text is very small or the readability is very poor, people are going to be really confused.

That can be very cognitively taxing and it can lead to information overload.

How can organisations ensure they have ethical frameworks in place?

A lot of this might not be rocket science to professional marketers because they’ve probably been using some of these nudges and tips and tricks for thousands of years to sell things.

What regulations change the consumer duty is now applying those to deliver good outcomes to the customers rather than just good commercial outcomes.

It’s about understanding what the purpose of your product is. Why should a consumer buy your product? What does it deliver? What’s the core out from you trying to get?

If you can really clearly write that down you can ensure that all your outcomes are in line with that. Having clarity on what you’re trying to deliver and then making sure you’re delivering it and using what may have been used for commercial ends also to deliver good outcomes for customers and for most products.

Usually the Venn diagram will overlap and there’ll be great commercial outcomes and great outcomes for customers.

What are some first steps an organisation can take to understanding this?

The great thing about behavioural science is that you don’t need a Ph.D. in maths to get your head around it and apply it for the good of your customers. A lot of it is very intuitive.

It’s about understanding the frameworks and then making sure that you apply it to deliver good customer outcomes. And understanding those frameworks can be relatively easy to do.

You can get some training for your team or encourage people to read some of those popular books that you see in Waterstones such as Thinking Fast and Slow by Daniel Kahneman, or Misbehaving by Richard Thaler.

You can get people thinking along those lines, thinking about what behavioural biases might be at play with this communication or this product or this particular type of customer? And do we think that might lead to harm? And if so, what can we do about it?

You don’t need to be a large organisation to do this well. Once you’ve then done that, you can then move on to the really exciting stuff like testing your communications and running behavioural experiments.