Professional Documents
Culture Documents
July 2005
July 2005
Contents
Introduction ................................................................................................................1 An independent perspective on consumer behaviour ................................................2 1. Personal triggers: Moments when we might.......................................................4 2. External trends: The impact of the outside world..................................................7 3. Financial traits: Four sources of variation .............................................................9 Appendix 1: Research methodology........................................................................11 Appendix 2: Personal triggers and examples of events ...........................................13 Appendix 3: Use of incentives and deterrents to change consumer behaviour .......14 Appendix 4: Financial traits.....................................................................................15
Introduction
Many consumers do not find it easy to identify their financial needs, much less the appropriate products or services to meet those needs. One solution is to help consumers understand the existing market in all its complexity. Another approach would be to encourage market and regulatory behaviours that are well attuned to consumers, and so make it more likely that they will find it easier to take effective actions. In the second quarter of 2003 we commissioned research1 to help us better understand: how consumers come to identify a financial need; and how they approach the selection and purchasing of financial products to meet that need.
The purpose of this paper is to report the results of the research as an input to our programme of work to help retail consumers achieve a fair deal. The research is just one contribution to our wider retail strategy, which aims to: create capable and confident consumers who have access to clear, simple and understandable information on which to base financial decisions; encourage well managed and soundly capitalised firms to treat their customers fairly and offer appropriate products; and deliver risk-based regulation.
Our hypothesis is that a better understanding of how consumers navigate the financial services maze will enhance the way we think about the maze itself, and change the way we fulfil our responsibilities. The paper summarises the findings and offers some thoughts on how they might influence our future work. In particular, the way they might influence: how we communicate with and educate consumers; our regulatory approach; and our contribution to industry and policy debates.
Key findings
Consumer approaches to financial services are varied and complex. Attitudes and behaviours vary from individual to individual, and may change according to circumstance. Despite this, we have identified three major influences on consumers financial decision making. Our research shows that consumers recognise these as factors that are genuinely relevant to them. This consumer recognition is important, since we want to find ways to make financial services more accessible to consumers. Taken together, these three influences appear to explain most of what might pull a consumer away from or push them towards a financial decision, and some of the reasons for diverse consumer responses. They are: Personal triggers events in an individuals life that may prompt awareness of a financial need (e.g. the birth of a child, redundancy, moving home) or provide an opportunity to build awareness of a need. These events can be categorised into six major triggers: - Family - Leisure - Housing - Health - Occupation - Windfalls/Losses
External trends major external events that shape consumers views and levels of trust, and therefore affect their behaviour. These include government or industry initiatives or changes in economic climate. Sometimes such events are enough in themselves to cause consumers to act, but more often they feel overwhelmed by information and choice. In this situation, consumers are likely to fall back on the advice of trusted choice editors2. When government wishes to initiate a change in behaviour, they often issue a call to action. These are most likely to achieve a response where the consumers perceive there are elements of both carrot and stick. Financial traits underlying attitudes of each individual to financial decision making. Consumer attitudes vary along four important dimensions: planning (short-term vs. long-term); risk (high vs. low tolerance); engagement (disinterested vs. engaged); and decision making style (intuitive vs. data-driven).
We know that consumers recognise all three influences as important factors in their financial decision making. The question for us is how we can best use this information. Our consumer financial capability work is the most obvious example, but there may also be implications for the way we regulate the retail market and supervise firms that are active in it. In this paper, we summarise our thoughts on the implications for the FSA and other stakeholders. We hope others will find this research helpful when they think about the retail financial services market and its regulation.
Key findings
A personal trigger is a strategic moment in someones life that may prompt them to enter or exit the financial marketplace. The research identified six triggers that consumers recognised as relevant to them. These were: family (e.g. marriage, divorce, new baby, elderly parents); occupation (e.g. new job, becoming self-employed, retirement); health (e.g. long or short-term illness, illness or death of someone close); housing (e.g. renting, buying, downsizing, renting out a room); leisure (e.g. holidays, travel, hobbies); and windfalls/losses (e.g. inheritance, gambling wins or losses, robbery).
Each trigger may be prompted by a number of different events, as above3. Triggers will vary for different people for example, the occupation trigger for one person might be promotion or further education, while for another it might be redundancy or retirement. All of us will experience multiple triggers over our lifetime as our circumstances change, but we don't necessarily experience them in the same order or at the same lifestage. Just experiencing a trigger event will not necessarily lead to action. A financial need may be present but people may not realise it, or they may identify the need but not know how to meet it.
Conduct of Business
We do not know how much we will want to take 'personal triggers' into account in our regulatory policy. But at this stage, we will want to consider whether our current regulatory structure puts unnecessary hurdles in the way of needs-based industry approaches. Over time, a needs-based financial capability strategy may drive demand for needs-based information or advice, possibly accessed through less familiar channels. For example, someone facing divorce might view their solicitor or marriage guidance counsellor as the logical first source of help. Similarly, the newly bereaved might initially be helped via hospitals and funeral directors. It is not our role to determine market structures. But as a regulator we want to ensure that, as far as possible, our regulatory structure does not put disproportionate regulatory hurdles in the way of these kinds of needs-based market developments. In due course, we may want to extend the basic advice philosophy to ease the access of consumers with straightforward needs to straightforward products. For example, it may be appropriate to apply different suitability tests when a consumer is seeking to invest a legacy, compared to a purchase intended to repay the capital on a mortgage or provide future income. A guided self-help approach could be developed to reflect needs; this might provide a spectrum of options from a fully comprehensive health check across all needs to specific product advice to meet identified needs. Information flows might also be driven by underlying needs. For example, periodic two-way disclosure between consumer and firm might be an appropriate way to check existing product portfolios are still suitable as the needs of the consumer change.
http://www.fsa.gov.uk/pubs/other/financial_capability.pdf
We are beginning a new project to streamline the Conduct of Business sourcebook, and plan to consider whether personal triggers might be relevant to this.
http://fsahandbook.info/FSA/handbook.jsp?doc=/handbook/TC
Key findings
External trends are events in the outside world that affect consumers attitudes to financial matters. These include government or industry initiatives, legislative changes, new distribution channels or changes in the economic climate. An external change may encourage people to seek advice or to purchase a financial product for example, the introduction of tax-efficient investments such as Individual Savings Accounts (ISAs). Or it may make them less willing to act for example, falling equity markets or confusion about new pension legislation. It is not always possible to link an external change directly to a specific outcome. Different changes may either reinforce or offset one another. Our research confirmed a development that many in financial services have already observed: consumers are increasingly resistant to government and industry messages as a result of declining trust, information overload, too much choice and perceived mixed messages from government. Many consumers are opting out rather than make choices in an uncertain environment. Given this, the key issue is how to get consumers to act. The research generated two clear messages for those seeking to influence consumers. Successful calls to action contain an element of both carrot and stick to influence consumer behaviour i.e. combining self-interest or financial incentive with some level of compulsion, financial penalty or other detriment, or the threat of enforcement.6 Consumers are turning to choice editors for financial advice, such as family, friends, media coverage, advice websites and independent financial advisers (IFAs). This is partly a trust issue, with consumers seeking advice from sources they trust (on financial or other issues) over that provided by financial institutions, and partly a search for short-cuts through the confusion of choice.
See Appendix 3 for campaigns using incentives and deterrents to influence consumer behaviour.
Conduct of Business
We consider that the external trends findings are unlikely to have significant implications for our work streamlining the Conduct of Business Sourcebook. While our rules exist for the benefit of consumers, they work through their effect on firms' behaviour and are not directly concerned with changing consumer behaviour. However, the external trends research does provide a further analytical tool for use in future public policy initiatives, particularly in our cost benefit analysis and our assessment of proposed regulatory changes from the perspective of consumers.
Key findings
While personal trigger events and external trends are drivers of consumer behaviour, they do not explain apparent contradictions why some people respond to a personal trigger but others do not - or why consumers respond differently to the same external changes. Financial traits are underlying attitudes that shape the way a person thinks about financial matters at a given time. The research identified four dominant financial traits. Financial planning: the extent to which a person takes a long or short-term perspective when making financial decisions. Financial risk: the willingness of an individual to take on financial risk. Financial engagement: the level of interest in financial matters. Financial decision making: whether a person bases their financial decisions on intuitive factors such as trust, or by analysing data and options.
For any given trait, there is a spectrum of possible attitudes7. For example, some consumers are natural planners, others are natural hedonists spending today rather than saving for tomorrow. An individual consumer can have attitudes on all four dimensions simultaneously and independently. This may explain why consumer behaviour can appear perverse an individual may be highly engaged and rational, but still fail to make a decision because they are risk-averse and take a short-term perspective. It is important to recognise that individual traits are not set in stone; they may change over time or in different contexts for that person.
The most difficult challenge for us (and for industry and policy makers) is likely to be finding ways to engage those consumers who have a low level of interest in financial planning and/or take a short-term perspective.
Conduct of Business
Financial traits are already being incorporated into Conduct of Business regime through other work, such as Key Facts, which seek to ensure that information is given to consumers in a way that they are likely to engage with and understand. This thinking can be further incorporated into our simplification work. Some particular areas worth considering are as follows. Treating customers fairly FSMA requires that firms take account of the lack of financial understanding among retail customers. The financial traits work provides more precise ways of analysing the reasons underlying low engagement and/or lack of understanding. We should inform firms about this work to assist them with their responsibility to recognise and address the needs of consumers with different financial traits, and treat all their customers fairly. Information for consumers The findings indicate a number of questions worth exploring such as: how to explain true risk to the risk-averse, how to communicate complex options to less engaged consumers, and how to help consumers with short-term perspectives engage with the need for long-term planning. Fact find/advice process/product choice Questions we might want to consider here include: how to make this easier or more relevant for the financially disengaged, and how to ensure that more intuitive decision makers make appropriate decisions.
At a general level, this information may be helpful for firms to segment their own information and marketing efforts, and to review messages to see if they work for different types of consumer.
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Based on this work, we identified three core influences on consumers: personal triggers, external environment and individual behavioural factors.
External environment: examining the effect of external factors on consumers financial decision making, and of different attempts to influence consumer behaviour. This included: in-depth interviews with experts from the Treasury, commercial firms and industry bodies, nongovernment organisations such as Which? and the Citizens Advice Bureau, think-tanks and academic institutions; desk research based on academic studies and other reports; and reference to The Henley Centres own knowledge bank of research.
Behavioural factors: assessing the relevance of existing behavioural models and building a financial traits framework for financial services. This was a desk research exercise, drawing on the work of commercial marketers and academics. The Henley Centre examined a wide range of published academic and marketing studies, corporate literature and websites, academic dissertation archives and previous FSA research and analysis. Members of the academic community were consulted to ensure the most recent thinking was included.
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The detailed research outcomes have been published separately in the FSA paper entitled: Towards understanding consumers' needs. Copies of this paper can be downloaded from the research publications section of the FSA website8.
http://www.fsa.gov.uk/Pages/Library/Other_publications/Consumer/index.shtml
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Occupation First job Change employers Promotion Made redundant Become part-time Become self-employed Relocate Return to education Retire early
Leisure Save for a new car Save for holidays/ travel Save for Christmas Upkeep of car Pay for driving lessons Spend on hobby
Health Short-term illness Long-term illness Disability Dental treatment Someone close falls ill or dies Become primary carer Change appearance Plan funeral
Windfalls/Losses Inheritance Retirement lump sum Redundancy payment Win lottery Cash gift Tax refund Gambling wins/losses Litigation about money Get into debt
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High most workers Additional income in now covered, though retirement some issues regarding Employer funded fees and returns All employees covered
High 72% of adults using direct debits (up from 14%) Negligible possibly due to mixing three woolly messages High good take-up of information and support by those wanting to stop smoking, fewer new smokers
Cheap, reliable and secure bill payment Save time/convenience Improved health and life expectancy Improved health and life expectancy
Cost and security disadvantages of other bill payment methods Impact of injudicious eating, drinking and smoking on health Effect of smoking on arteries/internal organs Taxation Smoking becomes socially unacceptable
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Short term
FINANCIAL PLANNING
Long term
Tend to make financial decisions quickly with little thought for long-term consequences. Want to know Whats in it for me now? Point-of-sale information has greatest impact.
Want to know longer-term benefits and risks. Seek comprehensive information before making decision. Appreciate financial planning tools (e.g. online calculators).
Risk tolerant
Are willing to take financial risks in the hope of achieving favourable outcomes, and to tolerate some losses.
Disengaged
FINANCIAL ENGAGEMENT
Engaged
Are disinterested in and/or fearful of personal finance. Tend to lack understanding of financial offerings, and disinclined to learn more. Prefer simple explanations without jargon or complex descriptions.
Are interested in and knowledgeable about financial services. Wish to manage their own finances, view as hobby not chore. Seek out relevant information. Enjoy using tools.
Data-driven
Tend to use logical, information-heavy approach (e.g. weighing up pros and cons). Focus on facts and figures so that they can easily compare different offers. Need to know they have considered all options.
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ISBN: 0117042862
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