Stand out for the right reasons - PwC › ee › et › publications › pub › regaining-conscio… · asset-by-asset rather than considering the whole investment portfolio Decision-making

Stand out forthe right reasons

Regaining consciousness:

Recognising and minimisingbehavioural biases

www.pwc.co.uk/fsrr

February 2015

PwC

Exploitative behaviour by staff

and behavioural biases among

customers, much of this unconscious,

can lose you valuable business,

jeopardise customer outcomes and

raise the risk of regulatory sanction.

How can you identify damaging

behaviour, tackle the causes and

limit the impact as part of a wider

focus on strengthening customer

understanding, protection

and retention?

Regaining consciousness: Recognising and minimising behavioural biases

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February 2015

PwC

Welcome toRegainingconsciousness:Recognising andminimisingbehavioural biases.

A lot of financial services (FS)organisations are changing the waythey design and market their productsand services to ensure they areappropriate to serve their customerneeds and meet regulatoryexpectations. But what most havefound is that no amount of guidancecan deliver the right outcomes unlessthey take account of the behaviouralbiases that do so much to influenceboth customer choices and staffattitudes, good and bad. Awareness ofthese biases is the essence ofbehavioural economics.

In our 2014 paper, Behaviouraleconomics: Driving better customeroutcomes1, we looked at how a betterunderstanding of how we as peopleoperate with biases, many of whichare unconscious and sometimes evenirrational, would improve your abilityto help customers make the rightchoices. This awareness would providea crucial source of competitiveadvantage by strengthening trust inyour organisation, sharpening yourcustomer focus and better meetingcustomer needs.

Greater awareness of behaviouralinfluences would also help you todemonstrate to the Financial ConductAuthority (FCA) that you’re puttingcustomer interests at the heart of yourbusiness. The latest research intobehavioural economics is informingthe FCA’s views on how much

customers understand what they’rebeing offered and whether they’remaking sufficiently informed andappropriate choices. The focus onbehaviour and outcomes coverswholesale as well as retail business.The individual ramifications formanagers and executive who fail totake account of their responsibilities inthis area are likely to be heightenedby the FCA’s proposed newaccountability framework2.

Greater understanding,better decisions

Drawing on our work with clients, thisfollow-up paper focuses on how todetect and limit the impact of thebehavioural biases which have a hugeinfluence on the way we all makedecisions as customers and as thosewho serve customers. While the biasescovered in a 2013 FCA paper provide auseful starting point (see Table 1), welook at a much broader spectrum ofpotential biases that we’ve identifiedin our work with clients. These rangefrom over-estimating the expertise ofthe sales agent to culturalmisunderstandings that may deter acustomer from doing business withyour company. You can’t eliminatethese biases altogether, but as weexplore in this paper, it is possible todevelop a more systematic approach torecognising where they influencedecisions, identify the root causes andmitigate the impact.

Are we really so rational?

1 http://www.pwc.co.uk/financial-services/regulation/other/behavioural-economics-driving-better-customer-outcomes.jhtml2 CP14/13 Strengthening accountability in banking: a new regulatory framework for individuals (http://www.fca.org.uk/news/

cp14-13-strengthening-accountability-in-banking)


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Table 1: Ten behavioural biases and effects in retail financial markets

Our preferences are influenced byemotions and psychologicalexperiences

Rules of thumb can lead toincorrect beliefs

We use decision-making short-cutswhen assessing available information

Present bias

E.g. spending on a credit card forimmediate gratification

Reference dependence and lossaversion

e.g. believing that insurance added onto a base product is cheap because thebase price is much higher

Regret and other emotions

e.g. buying insurance for peace of mind

Overconfidence

e.g. excessive belief in one’s ability topick winning stocks

Over-extrapolation

e.g. extrapolating from just a few yearsof investment returns to the future

Projection bias

e.g. taking out a payday loan withoutconsidering payment difficulties thatmay arise in the future

Framing, salience and limitedattention

e.g. overestimating the value of apackaged bank account because it ispresented in a particularly attractive way

Mental accounting andnarrow framing

e.g. investment decisions may be madeasset-by-asset rather than consideringthe whole investment portfolio

Decision-making rules of thumb

e.g. investment may be split equallyacross all the funds in a pension scheme,rather than making a careful allocationdecision

Persuasion and social influence

e.g. following financial advice becausean adviser is likeable

Source: Applying behavioural economics at the Financial Conduct Authority, Occasional Paper No 1, FCA, April 20133

3 https://www.fca.org.uk/static/documents/occasional-papers/occasional-paper-1.pdf


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Rooting out inappropriate bias andbehaviour will not only help to satisfyregulatory expectations, but also makecustomers feel more valued and morelikely to want to stay with yourbusiness. At a time when the demandson staff are mounting, a betterunderstanding of behaviour and biaswould also provide the basis for moreeffective guidance and support foryour staff.

In this paper, we also explore how totackle the exploitative behaviours thatcan result in staff presenting productsor securing sales in an inappropriateway. Clearly, it’s vital to eliminatesuch behaviours and recognise thatstaff too will hold biases. But as withcustomer biases the root causes maybe complex and not always obvious,especially where customer interestscome up against sales targets andother pressing commercial priorities.Simply applying more directives fromabove may not be enough to tacklethese pressures and biases. A moreeffective approach would be to identifythe underlying causes of thisbehaviour and tackle them at source.

PwC

We would all like to think that we’re broad-minded and rational people, but in reality we’re all susceptible to biases.Biases are essentially mental shortcuts we use to navigate everyday life and we wouldn’t be able to operate without them.But often we don’t even know they are influencing what we think or understand their impact on our decisions.

While biases are part of human nature, they vary amongst different cultural groups. In this paper we focus on the biasesand behaviours prevalent in the UK market. For global organisations the same principles set out here will apply acrossterritories, but the underlying biases and behaviours may be different across regions.

In the UK and indeed across many parts of the globe, first impressions have a disproportionate influence on ourdecisions. We’re also more likely to trust and favour people of a similar age and background to ourselves. A commonlycited impact of such unconscious bias is that despite the plethora of well-qualified candidates, women still only accountfor around 20% of FTSE board members, confounding years of equality legislation and workplace initiatives4.

Unconscious bias has a similarly pervasive and often irrational influence on our financial decisions. At a very basic level,examples include a willingness to spend more in lower denomination notes than higher ones5. Once we’ve signed on thedotted line, we also believe that what we’ve chosen is better than any of the alternatives, however mistaken this may be(‘choice-supportive biases)6. The FCA’s growing focus on such unconscious behaviour includes the extent to whichbusinesses may be relying on customer inertia as a way to avoid competition or provide unnecessary products and services.Why don’t more people switch when teaser rates no longer apply, for example?

Perception versus reality

At PwC, we’ve been looking closely at the nature and impact of biases and behaviours among customers and staff. Theirmain influence can be categorised as follows:

Customer bias

The hidden hand: The impact ofbehavioural biases

From first impressions to misplaced trust, unconscious biases can influence eventhe most important financial decisions and the way your company treats itscustomers.

4 How unconscious bias holds us back, Guardian, 1 May 20135 The denomination effect, Chicago University Journal, 7 April, 20096 Washing away post-decisional dissonance, Science, 7 January 2010


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1. Certainty

We want to find people in whom wecan place trust as this helps to easethe uncertainty we would prefer toavoid when making choices. Becausepeople are in a position of influencewe tend to trust them more. Wemight be more likely to buy aproduct from a branch managerthan one of their junior staff, forexample.

The potential for misplacedcertainty can also work in reverse.For example, research suggests aperson may be less likely to buy aproduct from someone whose firstlanguage isn’t their own. This isbecause they think the agent won’tunderstand their needs as well as anative speaker, even thoughthey may be just as well or evenbetter qualified.

2. Extrapolation(confirmation bias)

Because a person from the FSorganisation has shown themselvesto be knowledgeable aboutmortgages, customers might assumethey also know about other financialservices such as life insurance. Inreality, the agent may not know allthat much about life insurance sothe trust is misplaced.

3. Inertia (status quo bias)

We renew or persist with what wehave even though better optionsmight be available. Are yourcontract durations and termsappropriate to overcome thisinertia? Are customers being givensufficient information about theavailable options?

PwC


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February 2015

7 The most far-reaching study in this area is the Implicit Association Test (IAT) being carried out by researchers fromthe Universities of Harvard, Virginia and Washington (https://implicit.harvard.edu/implicit/iatdetails.html)

Putting customers first

Naturally, you want to put your customers’ interests first as you look to strengthen trust and customer-centricity.Providing products and services that meet customers’ real needs and deliver good outcomes is the surest foundation for along-term relationship. The FCA is also looking at what your business is doing to ensure that customers understand whatthey’re buying, that it is suitable for their needs and delivers the right outcomes. As we’ve seen, unconscious biases andexploitative behaviours can impede these efforts. So can you eliminate them?

While a lot of companies have tried to develop policies, guidance and training to root out these inappropriate andirrational behaviours, academic research shows that human nature is what it is and therefore there will always be somelevel of unconscious bias. But drawing on our wide-ranging work with FS organisations, we’re developing new ways toidentify where customer unconscious biases and agent exploitative behaviour are likely to be jeopardising customeroutcomes and interventions to address this. We explore these approaches in the next section.

Staff biases and behaviours

1. Peer pressure

Guidance from senior managementmight say that employees shouldput the customer first. But this maybe outweighed by pressure form linemanagement to meet sales targets.The pressure may not be overt. Forexample, if 55 minutes of an hourlong meeting are devoted to salesand five minutes to customeroutcomes, people will know which ismore important.

2. Framing

How issues are framed in marketingor by the salesperson have a hugeinfluence on the decision. At a basiclevel, this may be devoting moretime to the potential benefits thanthe risks or presenting fees as apercentage rather than a figure toplay down the perceived cost. Moresubtly, the salesperson might talkabout the overall returns from aportfolio fund, rather thanproviding a balanced explanation ofthe risk/return profile of theindividual investments within it.Focusing on the individualinvestments is a harder sell,especially as people are naturallyaverse to complexity, but it wouldensure that people are basingdecisions on all the facts.

3. Priming

Priming bias centres on the crucialmoments just before a decision ismade. Buyers might be offeredancillary products on top of themain service, such as adding legalcover to motor or home insurance,for example. People might also feelpressure to complete an onlineapplication and sign the termsbefore being timed-out. It’simportant to ensure that customershave sufficient time to make uptheir minds and don’t feel thatselection of one product isconditional on the purchase ofanother.

PwC

The customer’s best interest:Identifying and tackling biases

Customer surveys have long been used to gauge satisfactionand trust. But are they enough? By the time the feedbackshows that the customer is unhappy they may already havedecided to take their business elsewhere or the underlyingproblem has reached a stage that it’s going to invite attentionfrom the FCA. Moreover, metrics such as net promoterscores don’t gauge whether the customer actuallyunderstands the product or whether it’s right for them.

Investigating the root causes of lapses and complaints canhelp to identify recurring or underlying problems withinyour business. To what extent are customers confused by theterms and conditions for a particular product, for example?With the benefit of hindsight, do they subsequently regrettheir choice?

Such lag indicators may not be enough on their own. They’reespecially poor in detecting unconscious bias as a customermay be perfectly happy even though their choice of companyand product might owe more to inertia or misplaced trustthan genuine suitability or value for money. Other measuresincluding lead indicators are therefore needed to identify theattitudes, assumptions and possible biases that influencehow customers are perceived and treated. Understandingbias is an important part of this.

Steering through themoral maze

Almost everyone would say that theywant to put customer interests firstand make money for theirorganisation. But what if thesepriorities conflict? We’ve found that auseful way to find out what youremployees really think is to ask themwhat they would do when they’represented with a series of competingpriorities. For example, would theysell products that the customer didn’t

really understand or were unsuitableif they are under pressure to meetexacting sales targets? – In ourexperience they would. And thesequestions are just as relevant towholesale as retail business. Wouldemployees comply with what theybelieve their trading desk head wants,even if this runs counter to grouppolicy, for example? Asking peopleabout what they would do in suchscenarios will help you to establishthe ‘hierarchy of priorities’ thatgoverns their actions.

You can then ask your employeeswhat they think management wouldwant them to do, which may notalways be clear when they’re receivingmixed signals or priorities conflict.The results can help to determinewhether employees understand whatis expected and what really drivestheir behaviour.


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How can you effectively gauge whether you’re doing the right thing for yourcustomers and counter the influence of the biases that could undermine this?

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February 2015

8 Levels of financial capability in the UK, prepared for the Financial Services Authority by the Personal Finance ResearchCentre, University of Bristol, March 2006 (http://www.fca.org.uk/static/fca/documents/research/fsa-crpr47.pdf)

These types of study can providetelling insights into attitudeswithin particular units and thebusiness as a whole. Where we’vecarried out this work in industrypreviously, management has oftenbeen surprised by the extent towhich employees’ priorities runcounter to group policies. Inhelping to address unconsciousbiases, this analysis can beespecially useful in identifying keyrisk vulnerabilities. This includesscenarios where employees aren’tclear about what course to take andwill therefore fall back on instinct,routine and what their peers andleader would do, thus opening thedoor to heightened bias. Havingidentified these susceptibilities it’spossible to develop targetedinterventions, such as the re-design of products and salespractices or clearer guidance oncompeting priorities.

Addressing customer bias

A more systematic approach canalso help to identify and addresspotential customer biases.

If we look at certainty, there isnothing wrong with the assurancethat comes from trust as long as itisn’t misplaced. One way to assesswhether the perceived trust isjustified is to gauge theirunderstanding of the risks in theproduct they’re buying. If this isless than the reality then too muchtrust has been placed in thesalesperson and more guidance isneeded to ensure they’re properlyinformed.

Ensuring perception and realityare aligned is equally important inovercoming extrapolation. You canask the customer whatcompetencies they assume theagent possesses. In line with theexample cited earlier, how muchdo they know about life insuranceas well as mortgages?

You could also use the employeeanalysis described earlier tounderstand how staffcommunicate their particularexpertise and what they would doif asked about a business linethey’re less familiar with.

In tackling inertia, it’s important tojudge whether you’re doing enoughto help customers make informeddecisions and encourage them toshop around. This would includeactively alerting customers beforean offer has run out or letting themknow about better alternatives thatmay be available. Examples mightinclude highlighting the option totake out an enhanced annuity forsomeone with a long-term medicalcondition. From a behaviouralperspective, it would be useful toanalyse why some customersswitch and others don’t to ensurethat all information andopportunities to seek outalternatives are being provided.Are the renewal periodsappropriate or should the terms,benefits and risks be fully re-explained after a certain period oftime, for example? The underlyingpriority is to think of customers’needs as an evolving journeyrather than a one-off transaction,which stretches from marketingand advice through to when thecontract eventually comes toa close.

Cutting across all these evaluationsis a sense of how able customersare to take the right course.Research shows that very fewpeople are financially capableacross the four key areas ofmanaging money, planning ahead,choosing products and stayinginformed8. It’s therefore importantto understand where they areweaker or stronger and build thisinto an informed and responsibleapproach to customer advice andsupport.

While biases and behaviours mayseem difficult to analyse at firstglance, they are in fact measurableand can be used as an effectivesource of data for any customercentric risk managementframework. For example, byunderstanding the biases that existbased on historic data (such asvoice of the customer or staffsurveys), and comparing this to thedecisions made by individualsbased on trust (new customerdecisions or staff actions) willprovide you with insight aboutyour customers, your staff and thecultural journey of yourorganisation.

PwC

You might not always know what influences your employees’ behaviour, butyou can assess the attitudes that stem from this and seek to address anyproblems this may create by creating the right environment. Similarlybehaviours impacting customer choices may not always be rational, but youcan identify where this is likely to jeopardise their own positive outcomesand intervene on their behalf to help them to manage their own risks.

A real understanding of these biases and their implications is only just emergingand more instances are being identified every day. This underlines theimportance of getting to the roots of these issues and their impact, not justwithin the initial employee behaviour and customer decisions but along thefull customer journey.

The first step is for everyone to accept that both customers and staff havebiases. Building on this recognition, we believe that there are five keyquestions you would need to answer to stimulate your thinking on this issueand start putting customers first:

Your current employee and customer research isn’t enough to satisfactorilyaddress these questions, so it’s important to look at fresh ways to gaugebehaviour and influencers. The results aren’t just greater assurance thatyour staff are doing the right thing, but better outcomes for customers.

Do you really know what your staff and customersare thinking?


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Do you understand the different biases innate in your customers and staff on aterritory by territory basis?

How are customers informed about the choices available to them, and theirimplications? Do you take into account the biases that cloud their judgement whengiving and receiving information?

Have you got checks in place to test that customers understand the product andare neither a victim of their own bias, or agent behaviours?

How many examples do you have where an inappropriate product has been soldthat generated a negative customer outcome, but the customer went along with itbecause they trusted your agent?

Do your employees know what’s expected when there may be competing priorities?

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What can PwC do to help?

Customer Regulation Behaviour change

• Review of sales, marketing, adviceapproach and advertisingapproaches against behaviouraleconomic triggers.

• Product review process to identifywhether triggers have beenmissed intentionally orunintentionally.

• Detailed customer segmentationresearch using conjoint analysis(customer willingness vs. need)to inform strategy andproduct/service offering.

• Developing proposition andpricing strategies.

• Analysing desired customerbehaviours per product/service.

• Designing ‘smart’ informationdisclosures (timely, relevant,simple and easy to understand).

• Measurement of customeroutcomes.

• Provide tools to educate yourcustomers on how behaviouraleconomics influences theirdecisions.

• Undertaking a behaviouraleconomic diagnostic across thefirm for regulatory preparation.

• Support in building evidence ifinvestigated by the regulator.

• Help you to become an exemplarof best practice in the industry.

• Facilitate a review of thebusiness strategy to buildcustomer-centricity into theheart of organisation success.

• Identification of the key momentsthat matter for drivingcustomer-centricity.

• Leadership development tounderstand and role modelcustomer-centric behaviours.

• Review and redesign of HR leversto set expectations, develop andreward customer-centricbehaviours.

• Training to help relationshipteams get to know your customer,your products and identifypotential ‘exploiting’ scenarios.

• Build on/design regularorganisation wide assessments ofcustomer-centric culture to drivecontinuous improvement.


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The time to act is now

PwC can help firms evolve their understanding of conduct behaviours and biases, helping with the following:

PwC

Stand out for the right reasons

Financial services risk and regulationis an opportunity.

At PwC we work with you to embracechange in a way that delivers value toyour customers, and long-term growthand profits for your business. With ourhelp, you won’t just avoid potentialproblems, you’ll also get ahead.

We support you in four key areas.

• By alerting you to financial andregulatory risks we help you tounderstand the position you’re inand how to comply withregulations. You can then turn riskand regulation to your advantage.

• We help you to prepare for issuessuch as technical difficulties,operational failure or cyber attacks.By working with you to develop thesystems and processes that protectyour business you can becomemore resilient, reliable andeffective.

• Adapting your business to achievecultural change is right for yourcustomers and your people. Byequipping you with the insights andtools you need, we will helptransform your business and turnuncertainty into opportunity.

• Even the best processes orproducts sometimes fail. We helprepair any damage swiftly to buildeven greater levels of trust andconfidence.

Working with PwC brings a clearerunderstanding of where you are andwhere you want to be. Together, wecan develop transparent andcompelling business strategies forcustomers, regulators, employees andstakeholders. By adding our skills,experience and expertise to yours,your business can stand out for theright reasons.

About us


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February 2015

Alert

Protect

Adapt

Repair

Our approach to risk and regulation

www.pwc.co.uk/fsrr

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. Youshould not act upon the information contained in this publication without obtaining specific professional advice. No representation orwarranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to theextent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication or for any decision based on it.

© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to the UK member firm, and maysometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure forfurther details.

150213-165259-DB-OS

Contacts

Nicola Shield – PartnerFinancial Services Risk and Regulation Practice –Culture and Behaviour: Assessment and Measurement

T: +44 (0) 20 7804 9315E: [email protected]

David Kenmir – PartnerFinancial Services Risk and Regulation Practice –Co-Lead Conduct and Culture


Matthew King – PartnerFinancial Services Risk and Regulation Practice –Conduct Risk and Culture Change


Christopher Box – PartnerFinancial Services HR Practice – Culture,Value Alignment and Behavioural Change


Danielle Bennett – ManagerFinancial Services Risk and RegulationPractice – Conduct and Culture


Mark Dawson – PartnerFinancial Services Risk and RegulationPractice – Conduct Risk and Culture Change


Documents

Stand out for the right reasons - PwC › ee › et › publications › pub › regaining-conscio… · asset-by-asset rather than considering the whole investment portfolio Decision-making