Written by Chris McCullam on Monday 22 July 2013
At a recent seminar on European regulatory development Dan Hedley (Head of European Regulatory Policy for Fidelity Worldwide Investments) coined the phrase I used in the title of this blog. He drew on two themes of the FCA’s approach; competitive markets and behavioural economics. A competitive market requires rational consumers; behavioural economics tells us consumers aren’t rational so we might end up with regulation for ‘Treating Irrational Customers Fairly’.
Fallout from the RDR places ‘advice’ as too costly for many people, headlines about the mass market and mass affluent being priced out of advice have turned into announcements about D2C platform propositions designed to help this part of the market access investments. This is the market working to become competitive; the supply developing to meet the demand.
The challenge is in how to help customers make choices without giving advice (or making a personal recommendation as it is also known). People want to log on, make some choices and log off again; spending time doing the analysis isn’t high on most people’s agenda. Reportedly some of 70% of investments on D2C platforms go to short-lists, multi-manager and model portfolios where other experts have done the research and narrowed the field. Phrases like ‘crowd sourcing’ and being able to ‘follow’ other platform users are popping up as new D2C propositions are discussed. While getting ones decisions validated by reference to others is perfectly acceptable it does help to know something about those others.
When buying something from Amazon there is a tendency to filter by the number of stars it has been awarded, but should you just accept the highest rated? Do you discount items rated highly but by only a few people? Take a look at the distribution of star ratings, how many are low scores compared to high? When were they given? Are people saying it’s great after only having it out of the box for a day? Is the spectacular effect of the face cream or shampoo experienced by 76% of users actually 66 of the 87 girls who work in the building of the ad agency? These all sound like rational questions but the problem lies in the irrational behaviour of consumers; do they actively consider all these points or just gravitate to the one with 4 stars, free postage and a nice picture to save on clicking and reading pages of reviews. For D2C proposition using demographic data, risk ratings and risk profiles will help a consumer narrow down their ‘crowd’ to be more of people like them, in their kind of situation.
As regulators endeavour to save consumers from themselves there are rumblings lurking in IMD2 and MiFID2 around establishing ‘appropriateness checks’ for execution only business; the problem with this being that it might transpire the amount of information about the client required in order to establish appropriateness makes any purchase overly lengthy and complicated. As Kevin Okell argued in ‘do we still need to regulate advice’ if the regulator has increased focus on the product design and removed commission bias then the constraints around guidance diminish.
Taking the ‘appropriateness’ check to a crowd level might make more sense; some heavy weight analysis to identify what tends to be suitable for what type of consumer. That sounds similar to the type of work the FCA are expecting providers to do when manufacturing products in the first place; the appropriateness is baked in to the product design, building better, more consistent outcomes for a cohort rather than relying on personal recommendations for an individual. Applying the same design logic from the product build to any guidance rules means we shouldn’t find a situation where product design leads to product appropriateness in the way that “a woman needs a man like a fish needs a bicycle”.