When and how should the FCA intervene?
A few thoughts on the FCA's new approach to cost benefit analysis.
The FCA does a cost benefit analysis (CBA) before deciding on new interventions.
Full disclosure: this blog is fully down the economics rabbit hole... but I hope you will join me in seeing the importance of this stuff:
Four quick observations on the FCA's new approach:
1. Tooling up for more distributional interventions
The FCA is 'tooling up' for more interventions which benefit some groups of consumers, while costing other groups of consumers.
The FCA will navigate these trade-offs through:
Neither of these tools is entirely new to the FCA, but widespread use could shift the FCA's focus. Distributional effects are likely to be more at the heart of FCA interventions, going forward.
This 'tooling up' also implies that the FCA is not planning on only relying on the Consumer Duty to correct unfair distributional concerns.
Sometimes, distributional harms can only be addressed by old fashioned market-wide interventions (e.g. the FCA's intention behind the GIPP price remedy).?
2. Value of time (travel?)
The FCA is signalling that it will undertake more granular analysis of the true value of consumers' time. For example, what is the cost of consumers spending more time thinking about their finances?
Naturally, the FCA is borrowing heavily from the transport sector, where the analysis of time savings is the most advanced.
It's good to see that the behavioural economics of time savings will be incorporated (i.e. the so-called 'sign and size effects').
But, there is a bigger challenge… We want every consumer to make 'informed decisions' about all their (current and potential) financial products and services. Is this even possible within their limited time budgets?
If always making truly informed decisions would require time travel, then we have to ask whether we are thinking about the value of consumers' time in the right way…
3. More breakeven analysis please
When considering interventions, policymakers are understandably keen to focus on policies which are highly likely to be net positive for consumers and overall welfare.
A key question asks what would we need to assume in order for the CBA to return an overall positive figure. Or, in other words:
What would have to be true for the impact of the policy to be net positive?
The FCA calls this breakeven analysis, and has used it before. It's good to see breakeven analysis given a key role in CBAs.
It would be great to see even more prominence given to breakeven analysis in FCA consultations. This would help us focus less on the central estimate of the net benefit (which is always going to be highly uncertain). Instead, we will focus more on the realism (or otherwise) of the assumptions which are required for the policy to be net positive.
4. Evolution, not revolution
The CBA policy statement arose out of a desire for 'continuous improvement'. This will be a step up.
Having said that, you can draw a straight line from the FCA's (really useful) 2016 paper on Economics For Effective Regulation, through 8 years of incremental changes to CBAs, to this new Statement of Policy on Cost Benefit Analyses. This is evolution, more than revolution.
I look forward to seeing the new approach to CBAs in action. I anticipate spending much of my (valuable?) time going down new economic rabbit holes.
Consulting with regulators and the regulated
7 个月Good to see Tim's thoughts and the comments here. UK FCA is ahead of so many regulators (certainly those in Canada) on most fronts including other inputs so essential to decision-making (eg engagement, data collection, expertise). But FCA still needs to do much better on consumer fairness generally - don't get me started. The new approach to CBA will help (assuming some changes along the lines mentioned here, and with a laser focus on the consumer duty).
Professor of Practice in Financial Inclusion and Consumer Policy
7 个月Good to see more value being placed on consumer time. For years regulators have placed so much attention on the costs for firms and not for consumers. Time has huge implications for consumers and the assumption that they have endless amounts of time has led to many of the least time-rich paying heavily (including premiums for people in poverty, juggling multiple jobs and other demands - “scarcity mindset”.
Chief Economist at Payment Systems Regulator
7 个月Thank you for an interesting post: I very much agree with the need to consider carefully the assumptions and use CBAs a tool or framework to think through the effects of an intervention. Focusing too much on the central point of net benefits risks missing the uncertainty and distribution around that central point, as well as the different dimension of (often benefits) which are harder to monetise, even if they can be quantified. In this context I found your thoughts on break even analyses interesting.
Head of Retail Compliance (Advisory)
7 个月????