This month, the Australian Securities and Investments Commission (ASIC) and the Dutch Authority for the Financial Markets (AFM) published their report calling time on disclosures. ‘Disclosure’ means requiring firms to provide more information to customers, in the hope that they can then make informed choices about what they buy. With extensive evidence and a contents page that reads like a charge sheet – ‘Simplifying disclosure does not solve complexity’; ‘Few consumers pay attention to disclosure’; ‘Warnings can backfire’ – the report takes apart the idea that this alone can be a panacea.
This leaves us with a hard question: if disclosure isn’t enough, where should financial regulators look next? We think one answer is to start holding firms accountable for the outputs of customer decision-making (“Do your customers buy the product that actually turns out to be right for them?”) as much as for the inputs (“Is it theoretically possible to make the right choice based on the information provided?”).
We already know that thoughtful, situation-specific nudges can make a big difference. At BIT, we’ve seen how adding a simple credit card repayment slider can increase average repayments (from £225 to £276), or how a one-page ‘Pensions Passport’ can multiply the number of people engaging with retirement planning tenfold (from 1% to 11%).
But case-by-case interventions don’t solve the basic asymmetry between resource-constrained regulators on the one hand, and an inventive financial sector with control over the ‘choice architecture’ of consumers’ decisions on the other. A company that can decide how offers are presented, when and where they are made, who they are marketed to, and how they are personalised has everything it needs to frustrate the best intentions of regulators. Indeed, ASIC reports that its own superannuation dashboard fell foul of this: firms gamed the metrics, and in reality only a tiny fraction of consumers were able to navigate the information correctly.
An alternative course is to take a stronger line on the relative merits of the products being offered. Richard Thaler has written about “no-brainer” options in health insurance, which are better in every way than ‘dominated’ alternatives offered by the same firm. When companies persist in offering these dominated alternatives, whether by accident or design, they are setting a kind of trap. The consumer is faced with a ‘decision’ which is less like picking what flavour of ice-cream they want, and more like a maths question with a set of trick answers.
In extreme cases, we can be mathematically certain that a product would be a bad choice for everyone, under all circumstances. But regulators don’t have to suspend judgment in situations which are less clear cut. They can instead start asking (and answering) some empirical questions:
- For a given product class, how much variation in consumer needs is there really?
- Are there products which in reality would be a bad choice for most consumers, most of the time?
- In practice, are consumers finding the options that are right for them, or are they falling through trap doors?
- And can we use data to make this objective? For example, can we use consumers’ spending and repayment patterns on a credit card and to say with certainty if they would have been better with an alternative plan to the one they chose?
These are hard questions to answer, but they could eventually make parts of regulators’ jobs easier. Holding companies accountable by scrutinising the actual choices of a random sample of customers means that you no longer need to check every detail of their product information packages or automated phone warnings.
At the moment, regulators have to play whack-a-mole with firms’ lazy or hostile choice architecture: fix one problem, and another pops up. As ASIC and AFM’s report shows, this is a losing battle. We should instead push for a world where it is the responsibility of those firms to stop posing trick questions, and to start letting their customers skip to the answer.*
* Ryan Buell’s recent experiment suggests that this might not be so bad for firms either: being upfront about the trade-offs between different types of credit card increased usage, and cut cancellation rates by 20.5%.