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It is therefore essential for a financial services marketer not only to be aware of regulations that over and restrict their marketing activities, but also to be fully aware of the company policies that may constrain the scope of activities one could engage in. Unfair, deceptive, or abusive acts and practices can cause significant financial injury to consumers, erode consumer confidence, and undermine the financial marketplace (Wright, 2011).
Under the Dodd-Frank Act, it is unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive or abusive act or practice. Understanding the factors that determine which options nonusers choose and whether they make rather than defer purchase decisions is critical for the development of marketing strategies. A major contribution of behavioral decision research has been to establish the notion of uncertain preferences, the idea that consumer preferences are not well defined but rather constructed in the process of making a choice (Envenoms, 2009).
This constructive viewpoint suggests that different tasks and contexts highlight different aspects of the options, focusing consumers on different considerations that lead to seemingly inconsistent decisions (Envenoms, 2009). It is argued that the overwhelming advantage firms have in knowledge and understanding means that it is essential for the regulator to ensure that products and services provided by the industry should do what consumers reasonably expect.
Clearly consumers need to act sensibly when making decisions about financial services. However, all too often the products they are being sold are so complex and the risks involved so unclear that it is impossible for them to make reasoned decisions (Wright, 2011). Consumer protection is an essential element of any financial system. Not only is it important to protect already existing financial consumers, but it also helps to instill confidence in the financial system for potential future consumers.
Without basic protective measures, inexperienced consumers are more vulnerable to abusive sales and collections practices and to being sold inappropriate or even harmful products (Envenoms, 2009). That’s why it is vital that consumer protection regimes take into account the particular needs and challenges faced by consumers. Every financial institution should consider three major consumer protection elements: Transparency – Do customers understand costs and key terms of the products they use? How easily can they compare similar products?
What reforms can improve transparency and consumer understanding? The Consumer Protections Act with Authority and Independence creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices (Roadman, 2010). Fair Treatment – Are there industry practices towards customers that warrant intervention (e. G. Misleading sales practices, false advertising)?
How best do you regulate against and monitor these practices? These practices can be monitor by the regulations that affects financial advertising. The Consumer Protection from Unfair Trading Regulations mean you can’t mislead or harass consumers by, for example: including false or deceptive messages, leaving out important information and using aggressive sales techniques (Roadman, 2010). Effective Recourse – What channels exist and are most effective for resolving consumers’ issues? How effective are these channels in practice? What are the roles of internal vs.. Third-party dispute resolution?
These Consumers protection policies can’t be designed based only on what look-alikes think consumers need. They must be grounded in the reality of consumers’ lives, based on solid research that shows how people really act and interact with their financial services, and which provides insights into their vulnerabilities (Roadman, 2010). According to Roadman author of “The Dodd Frank Wall Street Reform and Consumer Protection Act” recent research in behavioral economics has revealed that all types of consumers can behave in certain irrational ways, impacting consumers’ ability to make sound financial decisions.
People are impatient and discount (Asymmetric Discounting) future rewards more hen they are asked to delay consumption than when they are offered the chance to accelerate consumption (Harass, 2004). Asymmetric discounting implies that consumers are relatively farsighted when making tradeoffs between rewards at different times in the future, but pursue immediate gratification when it is available (Camera, 2006). Discounting is most likely to be found for products that involve immediate benefits with delayed cost such as the use of credit cards.
People often make errors when choosing and using financial products, and can suffer considerable losses as a result. Using behavioral economics we can understand how these errors arise, why they persist, and what we can do to ameliorate them (Aerate, 2014). According to Aerate author of “Applying Behavioral Economics at the Financial Conduct Authority’ People do not always make choices in a rational and calculated way. In fact, most human decision-making uses thought processes that are intuitive and automatic rather than deliberative and controlled. Firms play a crucial role in shaping consumer choices.
Product design, marketing or sales processes can intensify the effects of preconceptions and cause problems (Aerate, 2014). Firms can respond to the different preconception in specific way. One important response is that firms will tend to increase future pricing and decrease present prices in which they know will be attractive to consumer because of their thinking process. If consumers tend to underestimate how much they will spend on their credit card in the future (because of projection bias or overconfidence), firms have an incentive to offer low rates today with higher rates later (Aerate, 2014).
The way consumers analyze present gratification and future results affects competition within the financial service market. They can lead firms to compete in ways that are not in consumer interests, e. G. By offering products that appeal to the consumer because they appeal to present gratification (Aerate, 2014). Based on evidence on the common mistakes people make, firms suggest a set of indicators that can help identify where consumer detriment from mistakes may be particularly high (Aerate, 2014).
The indicators highlight potentially problematic consumer and firm behaviors and product features. A complementary approach to detecting issues is to identify the true economic function of a product and then evaluate whether consumers actually SE the product for this function, or for another reason (Aerate, 2014). It is important for financial service marketers to understand the rules and regulations guarding consumer’s protection. Behavioral economics offers new perspectives on interventions that the FCC (Financial Conduct Authority) could use, for behavioral and other problems in the market.
Ordered from least to most interventionist, there are four ways in which the FCC could solve consumer problems: Provide information, require firms to provide information in a specific way or prohibit specific marketing eateries or practices, Adjust how choices are presented to consumers, Require products to be promoted or sold only through particular channels or only to certain types of clients and ban specific product features or whole products that appear designed to exploit, or require products to contain specific features (Aerate, 2014).
Behavioral economics will help formulate what we mean by ‘an appropriate degree of consumer protection’ and assess what level of responsibility consumers may be reasonably expected to bear. The “attraction effect” refers to instances in which adding an unattractive option to a hooch set increases the choice share of the option it most closely resembles (Frederick, 2011). Managers can readily manipulate the composition of choice sets. Decoy products are items that are inferior to other items in a given set of recommended products.
The attraction effect is a type of decoy effect. Financial Firms tend to unjustly implements this effect for the following reasons: Increased selection probability for target items: as already mentioned, adding additional inferior items to a result set can cause an increased share of target items. This scenario definitely has ethical aspects to be dealt with since companies can tangentially try to apply decoy effects for selling products that are maybe suboptimal for the customer (Pilfering, 2010).
Increased decision confidence: beside an increase of the share of the target product, decoy effects can be exploited for increasing the decision confidence of a consumer. In this context, the attraction effects can be exploited for resolving cognitive dilemmas, which occur when a user is unsure about which alternative to choose fro a given set of nearly equivalent alternatives (Pilfering, 2010). Increased willingness to buy: from empirical studies we know that a user’s level of rust (confidence) in recommendations is directly correlated with the willingness to buy, I. . , increasing the level of trust directly means that the purchase probability ca be increased as well (Pilfering, 2010). These practices can be considered highly unethical and are sometimes prohibited b company polices and also by certain regulations. These practices have resulted in legal challenges by regulatory bodies such as the NASA, the SEC and the State Insurance department (Woman, 2009).
The results of prior research suggest that individuals use cognitively tractable session strategies, known as heuristics, to cope with complex and uncertain situations. These heuristics reduce complex inference tasks to relatively simple cognitive operations (Aerate, 2014). Although these “mental short-cuts” help individuals in dealing with complex and uncertain situations, they may also lead to systematically skewed outcomes.
The anchoring effect is one of the most studied cognitive biases that lead individuals to make sub-optimal decisions (Cent, 2010). The anchoring effect refers to the adjustment of one’s assessment, higher or lower, based upon previously presented external information. The anchoring heuristic appears to be prevalent throughout human decision processes and has been shown to reliably influence judgments in a variety of domains including probability estimates, negotiation, legal judgments, and general knowledge (Aerate, 2014).
Research has established that, whew evaluating payments over a number of periods of time consumer’s sensitivity to the number of periods is considerably lower than the periodic payments (Woman, 2009) According to Woman author of “Marketing Financial Services” the anchoring and adjustment principle suggests that the most favorable presentation of a financial offer needs to take into account which financial product attribute is most likely to be used by the consumer as a anchor for forming initial Judgment (Woman, 2009).