MR No. 2016 – 04
21 April 2016
Feelings and fears are the key things that stop consumers making good decisions when it comes to their finances or investments. A cross-government paper released by the Financial Markets Authority (FMA) today delves further into why we behave this way.
Using behavioural insights to improve financial capability looks into what influences your decisions and whether you are aware of them or not. This was the result of a partnership between the FMA, the Ministry of Business, Innovation and Employment (MBIE), Treasury, the Inland Revenue Department and the Commission for Financial Capability (CFFC). As detailed in the paper, the key barriers to good investment and financial decisions are our:
Globally, there is a trend toward using insights from behavioural economics and psychology, to look deeper into decision-making fundamentals. The four interventions that can assist with making good decisions are detailed in the paper as the EAST framework:
In New Zealand, the FMA is aware that financial service providers already use behavioural techniques to better understand their customers, but primarily for commercial purposes.
However the Government agencies that partnered for the paper are encouraging financial service providers to also use the understanding that comes from this work, to help their customers make better financial decisions which are often complex and have long-term impacts.
Paul Gregory, FMA Director of External Communications and Investor Capability, says “The best time to help New Zealanders focus on making good financial decisions is when they’re actually making them. That means the investment and broader financial industry has an essential role. So, as well as the work government agencies are doing, we look to industry to use these insights positively: in their product design and marketing, disclosure, and in their sales processes.
“This is in all of our interests. We can’t have fair, efficient and transparent New Zealand financial markets if decisions are being made on the basis of bias or other emotions.”
Industry has used insights to develop interventions successfully trialled overseas. These include text message reminders to repay loans, using commitment devices to encourage savings, and presenting fees in dollar rather than percentage terms.
As well as writing a paper, the FMA, MBIE and CFFC have partnered with Kiwi Wealth on a behavioural insights trial to commence later this year. The trial will assess different approaches to encouraging default KiwiSaver members to make an active fund choice. Results will be shared with industry once the trial is complete.
The full white paper, Using behavioural insights to improve financial capability, is available here.
The white paper reflects the interest government has in understanding the best ways to improve financial capability, including through policy design and consumer protection regulation and supervision. It is the first in an occasional series of papers the FMA intends to publish to set out our thinking, or to describe things we or others are doing, which are relevant to regulation of New Zealand’s financial markets
Please contact us if you would like to discuss behavioural insights further with contributor Dr Marcos Pelenur, MBIE lead on behavioural insights and formerly of the UK Behavioural Insights team.
09 300 0465 or 021 847 192