It’s clear that regulated markets are not currently delivering the best outcomes for UK consumers. In the UK, we are collectively overpaying for mobile phone contracts by £355 million a year and almost 9.5 million households would be able to save over £300 each year by switching energy provider.
In last week’s Queen’s Speech, the Government outlined its plans to bring forward a Better Markets Bill, to ‘open up markets, boost competition, give consumers more power and choice and make economic regulators work better.’
Here at the Behavioural Insights Team, we have been grappling with these issues over the past five years, and today we are publishing our latest, and most comprehensive, report covering this area: Applying behavioural insights to regulated markets, commissioned by Citizens Advice.
In the report we set out a new vision, arguing that placing behavioural insights at the heart of regulation will reap significant benefits for consumers. Behavioural science offers both explanations for, and solutions to, behaviour that leads to consumers paying more than they need to and sticking with suppliers even when there are better deals and higher customer satisfaction elsewhere in the market.
UK regulators are increasingly incorporating behavioural science into their approach, indeed the FCA has its own Behavioural Economics and Data Science Unit. However, we believe there are real opportunities to build upon the foundations already laid.
We argue that regulators should be designing remedies with behavioural science at the forefront of their thinking, to help consumers make better choices for themselves and prevent businesses from exploiting their behavioural biases. This new approach is not necessarily about introducing more regulation, but making regulation more effective. Indeed, in some cases this approach may point towards the replacement of detailed regulations with principled-based regulations which set out the outcomes the regulator expects the market to deliver for consumers.
The report also features detailed examples of how behavioural insights could be applied to UK regulated markets, for example:
- Regulators should use existing forms of aggregated data, such as complaints and consumer reviews, to develop a more complete understanding of markets, identify where behavioural (and traditional) market failures may be occurring, and address problem areas before they escalate. These metrics should be made public to allow consumers to make quick comparisons between different suppliers at the point of purchase.
- Regulators should be designing behaviourally-informed remedies and systematically testing whether they are delivering good outcomes for consumers. For example, as recommended in the CMA’s Energy Market Investigation, Ofgem should work with energy suppliers to test different timely prompts aiming to increase switching rates.
The CMA’s forthcoming decisions on investigations into the retail banking market and energy market present an excellent opportunity for regulators to incorporate and test this behavioural approach.
We welcome responses to this report. Please email email@example.com to get in touch.