Financial Services Authority, Basic Advice & Consumer Choice _________________
Basic Advice >>
Basic Advice was introduced for the sale of the Government's suite of 'stakeholder' savings and investment products in 2005. It is designed for consumers who find it difficult to enter the financial advice market due to cost, and as such are likely to have no previous investment experience.
So far, the take up of Basic Advice has been low. The FSA carried out a post-implementation review. As part of this, an assessment was needed of the potential size of the market for products delivered through the Basic Advice channel. Our work therefore aimed to assess:
- The number of consumers who might buy equity products, and the value of their saving
- The extent to which such consumers might choose the Basic Advice channel
Almost one in 10 adults in Britain do not use mainstream financial services, and most of these are not in paid employment. However, most people without paid work do have bank accounts. Two hypotheses have been put forward to account for this minority without accounts: (i) reluctance by financial institutions to serve low-income customers; or (ii) information failure on the part of non-consumers.
Volterra's modelling has shown that non-consumers of financial services are distinguishable from consumers only by belonging to social networks where financial services usage is relatively low. This supports the information failure hypothesis, in that decision makers often pay attention to each other when choosing between alternative courses of action. This is especially so when there is limited information about the problem and/or limited ability to process even the information that is available - which describes well the decision to use financial services for the first time.
Using survey data from the ONS, our modelling has also shown that a small world network best describes the way in which information and influence affect people's decisions in this market. Since it is difficult for changes in behavioural rules to percolate across small world networks, information failure is likely to persist and people who have not taken up the Basic Advice product are unlikely to switch.
These results imply that take-up will remain low, and that conventional marketing techniques are unlikely to change this outcome. Marketing strategies that recognise the specific features of the small world network may, however, be able to trigger a cascade of behavioural change and improved uptake of the product.
Consumer Choice >>
In standard economic theory consumers gather information about all available products, and each person chooses the one which most closely matches his or her preferences. The more products available, the more likely it is that consumers can find close matches to their preferences. Overall, consumers are always better off with more products. It is now well established that many of the assumptions underlying this rational choice theory are unrealistic.
Having been comissioned by the FSA, Volterra developed a model of consumer choice which addressed the question - does an increase in the number of products available to consumers lead to consumers feeling better or worse off?
We introduce three additional behavioural factors into the process of consumer choice which are well documented in the modern literature:
- Costs of gathering and processing information
- Uncertainty about the attributes of products
- 'Regret aversion' - consumers may worry that, despite the time invested in making a choice, they could have chosen a better one
