By guest contributor Simon Russell, Director, Behavioural Finance Australia
The new product design and distribution obligations are due to come into effect in October 2021. If your organisation issues or distributes investment or credit products, now is your chance to prepare. This article examines what you need to know about behavioural finance and associated decision-making research to implement these new requirements successfully.
Background
The product design and distribution obligations are the latest attempt to remedy poor consumer outcomes. In broad terms, the new obligations require that products are distributed to consumers for whom they are suited. The obligations will apply to a range of financial products, including investments, super, insurance and various credit products. The obligations are particularly relevant for super funds, investment product providers, banks, credit unions and insurers, among others. They appear to indirectly impact financial advisers and mortgage brokers too.
Within these organisations the new obligations are relevant for people in roles covering:
- Sales, marketing, client engagement and advice (who might need to change their promotional and explanatory materials, call scripts and web sites).
- Product design (who might need to redesign products and their features).
- Technology, data and customer insights (who might help to implement changes to products or the way they are presented, or use data to assess consumers’ needs).
- Leadership, governance, legal and risk management (who might need to assess the adequacy of their organisation’s product governance arrangements).
The broad approach taken by ASIC, as evidenced by their draft regulatory guide and consultation paper, aligns with the behavioural finance and associated decision-making research in several ways. This article outlines one specific psychological issue product issuers and distributors need to consider. Subsequent articles in this series outline a further 3 psychological issues.
How do you create an appropriate choice architecture?
ASIC mentions the importance of ‘choice architecture’ 16 times in their draft regulatory guide. By ‘choice architecture’ they refer to ‘features in an environment, noticed and unnoticed, that influence consumer decisions and actions. These features are present at every stage of product design and distribution.’
ASIC’s emphasis on the role of choice architecture is consistent with a resounding finding of behavioural research that people’s decisions can sometimes be influenced in important ways by how information is framed and presented to them. My own research demonstrates this too. For example, people’s choices can be influenced by the order in which information is presented. In an experiment in which I gave investors the choices of two investment options they tended to choose the option with the better long-term returns if those long-term returns were shown on the left-hand side of a table of returns, rather than on the right.