Consumer Duty: what does behavioural bias really mean?
The new Consumer Duty regulation makes clear that financial services companies need to take into account an understanding of ‘behavioural bias’ when they are developing and communicating about their products and services, as well as through their customer journeys and relationships.
This is the latest in a long-running shift by the FCA to embrace a deep understanding of behavioural science to ensure that consumers are protected against both nefarious and accidental psychological exploitation by banks, insurers and other providers.
The words ‘behavioural bias’ appear 17 times in the document. They underpin all three ‘cross-cutting rules’ of the Duty - including the requirement to act in good faith, to avoid foreseeable harm and to support the pursuit of an individual’s financial objectives.
In short, getting this right in everything you do is instrumental to abiding by the new rules.
But what is meant by behavioural bias, in this context?
Gremlin hunting
An initial reading of the Duty suggests it’s all about avoiding bad practice - i.e. when ‘nudge’ slips into ‘sludge’.
It’s well established that unscrupulous consumer-facing companies can (and have often in the past) deployed sludgey tactics to encourage you to purchase the wrong product, too quickly and without due thought.
Think Ryanair hiding the phrase ‘Don’t Insure Me’ alphabetically amongst a list of ‘Countries of Residence’ to try to trick you into taking out a policy you don’t need. In UX, this is called a ‘dark pattern’.
Erasing such gremlins from your consumer journeys ought to be a no brainer. They should never have been implemented in the first place, and if they accidentally found their way in, then a behavioural audit is a good place to start to remove them.
Biased by omission
However, we believe that the definition of avoiding bias goes beyond simply removing sludge, and must also cover the inclusion of tactics designed to dial down biases.
Every behavioural bias we have carries the risk that it will tip us towards an unwanted outcome, but - for the majority of those biases - academics have already identified a de-biasing strategy that makes them less likely to impact our decision making.
Take present bias (or discounting the future, or hyperbolic discounting, or whatever you want to call it), for example.
The fact we tend to focus on the here and now and over-value immediate rewards at the expense of long-term benefits is a critical issue for financial services. Yet, as psychologists, we also know we can minimise its effects if we help customers ‘time travel’ into the future.
What this means is - techniques that help customers to vividly imagine their future selves and the decisions that an older version of us might make, have been proven to encourage more saving for the future and less recklessness today.
It is not hard to imagine that employing such techniques within customer purchase journeys will soon become a hygiene factor for financial services brands, and any company that omits to do so will be guilty of failing to ‘avoid bias’.
Beyond cognitive: avoiding emotional biases
The Consumer Duty refers to an academic definition of behavioural bias as ‘specific ways in which normal human thought systematically departs from being fully rational’. This is vague enough to require further clarification of what’s in and what’s out.
Elsewhere, in a 2013 paper, the FCA defined various psychological factors that make decisions about money particularly prone to bias. One of these is that we are often influenced by our emotions.
Are emotions a bias? Well, in some senses - yes. The ‘affect bias’ is a catch-all term that covers the influence of all emotions on decision making. ‘Hot and cold states’ are another behavioural concept that fundamentally focuses on emotion.
In that sense then, the Duty also asks firms to take into account how a customers’ emotional state can affect whether or not they achieve a ‘good outcome’.
This is a complex area, because a customer’s emotional state can be influenced by many things - like past experiences, the surrounding context or the level of weight they attach to a decision.
But it’s not unreasonable to expect providers to have considered and implemented ways that will ensure customers’ emotions help, rather than hinder, the decision. We are working with clients on exactly this issue right now.
Dealing with customers’ emotions will be particularly important in 1-2-1 conversations (for example with advisers or telephony staff), and may even mandate a need for staff training.
Looking ahead: new frontiers
The debate about bias will not stop at what we can see on the surface. It is likely that in the future, we will need to consider deeper influences on our emotions and decision-making.
For example, IB’s proprietary research has revealed that our personality, our thinking style and our fundamental motivational values influence the degree of confidence we have in making financial decisions.
De-biasing to help someone who is a freeform thinker, has limited conscientiousness or is too idealistic to make better decisions might seem a stretch now - but the march of applied behavioural science is relentless, and these things will need to be addressed in due course.
So how should companies deal with behavioural bias?
The first step for many companies is going to be to start behaviourally auditing key products, communications and customer journeys. That tactical approach will produce quick wins, but it will be challenging to scale across every touchpoint in the organisation.
The key therefore to meeting the requirements of the Duty by July 2023 will be to turn specific learnings about individual journeys into an overarching set of strategic psychological principles that can be applied across all touchpoints.
Key things for your to-do list:
Embrace the breadth of potential biases we’ve highlighted and put customer experience at the heart of your activities.
Ensure your insight and audit activities cover not just how to remove gremlins, but also the entirety of the customer psychological experience.
Use tactical insight and audit activities to inspire strategic psychological frameworks by channel.
Train your teams to apply. those frameworks and empower them to own customer experience
Be open to continual learning - behavioural bias definitions and de-biasing standards will evolve.
If you would like to talk more about Consumer Duty, behavioural bias, or how financial behaviour is affected by our deep psychological motivations, please email me at jamie@weareib.co