Financial regulation has been built on an underlying assumption: if firms provide consumers with enough information, consumers can make good decisions - making transparency a cornerstone of consumer protection. Previously, if firms gave their customers clear disclosures, risk warnings, and detailed documentation, the regulator would consider disclosure standards as met. This approach is now evolving.
The Consumer Duty was introduced on 31 July 2023 for open-book products and services, and 31 July 2024 for closed-book products and services. Given this time-frame, today firms are generally working to embed the principles of the Consumer Duty throughout the product lifecycle.
There exists variation in progress to meet the requirements, with the FCA highlighting that firms have come across challenges when conducting fair value assessments, and paying close attention to how firms are implementing the consumer understanding outcome.
The FCA’s recent review
The FCA’s recent review of consumer understanding in March 2026, detailing good practice and areas for improvement, illustrates why consumer understanding matters. The FCA highlights that communication design plays a key role in whether consumers experience fair value. Many firms have made progress, and communications are becoming cleared. The review confirms that firms are thinking more carefully about accessibility needs (e.g., the option to enlarge text), and some organisations have begun testing whether customers understand the information they receive.
The review also highlights an ongoing gap, with the FCA highlighting that ‘some firms made surface level changes, shorter wording, new icons or colour changes without improving clarity, sequencing or prominence of key information’, ultimately leading to ‘customers missing or misinterpreting core points’. This gap between information and true understanding is exactly where behavioural economics becomes essential.
While behavioural economics is well-established in some settings, its application to regulatory compliance in financial services is still emerging. Behavioural economics examines how people make decisions. Unlike traditional economic theory, which assumes consumers act rationally and process all available information, research in the behavioural economics field shows that consumers possess cognitive biases which impact decision-making in a systematic way.
Consumers often rely on shortcuts and emotional cues (named heuristics in the behavioural economics field), and can persist with the status quo when making choices. Firms may be able to mitigate the unintended harm caused by these through choice architecture (as explained later in this article).
Behavioural economics shows that consumers systematically rely on these mental shortcuts and emotional cues rather than fully rational analysis. These cognitive biases impact decision-making across many contexts – not just in financial services.
In financial services, these tendencies are significantly amplified. Selecting a mortgage, an insurance policy, or an investment product is something that most consumers do infrequently, meaning that they lack the experience and familiarity to navigate these decisions confidently. Products are complex, outcomes are uncertain and the terminology is often misunderstood. Even well-informed consumers can struggle to understand fee structures, exclusions, and long-term risk.
The Consumer Duty seeks to improve consumer outcomes. If firms want to deliver on this they have to move beyond disclosure and begin designing communications and products that account for human behaviour.
Why disclosure alone is insufficient: The art of salience
One of the most crucial insights from behavioural economics is that the way information is presented often matters more than the amount of information provided. Consumers may not read every document carefully, and instead, they may focus on the information that stands out most clearly. Behavioural economists call this phenomenon salience.
Salience plays a significant role in financial services. If the most visible piece of information is a headline interest rate, monthly premium or a promotional benefit, that is what consumers will focus on. Important details such as fees, conditions, or risks may be disclosed but receive little attention because they are less prominent.
Even when this information is disclosed, it may not be understood. For example, if the customer’s attention has already been captured elsewhere. Consumer misunderstanding often reflects design factors, rather than information provision. Re-designing how information is framed to the consumer can alleviate this problem and help firms meet their customer’s needs.
When choice hinders decisions, inertia occurs
Financial markets often present consumers with a large number of product variations. While competition is beneficial, too many options may make decisions harder for customers. When faced with complexity, consumers often rely on simpler shortcuts or avoid making a decision altogether. This is particularly visible in pensions and investment markets, where consumers frequently stick with default options simply because changing requires effort and confidence. Behavioural economists call this phenomenon inertia.
Firms should be thoughtful about inertia. In some cases, such as auto-enrolment in pensions, it can work in a consumer’s favour. In others, it can leave consumers with products that no longer meet their needs. The Consumer Duty asks firms to consider which side of the line their product sits on.
Rethinking consumer understanding to communicate with clarity
Insurance products provide a clear illustration of the challenge. Many consumers buy travel insurance policies quickly while booking a trip online. At that moment, their attention might be focused on flights, accommodation, and other aspects of the trip, meaning the insurance purchase often becomes a quick add-on at the end of the booking journey. The consumer may see a low premium and assume the policy offers broad protection, yet many policies contain exclusions relating to pre-existing medical conditions, certain activities, or cancellation scenarios. This could lead to consumers purchasing insurance which they are unable to claim from, meaning the consumer could experience poor value. These exclusions are typically disclosed in policy documentation, but they are often deep within lengthy documents that consumers rarely read in full before purchase.
From a behavioural perspective, the problem is not necessarily that firms failed to disclose the information. The problem is that the design of the decision journey does not encourage consumers to engage with it.
Choice architecture refers to the way in which options are organised and presented to individuals, shaping how they interpret information and ultimately what they choose. By using intelligent choice architecture, firms can design decision environments that reflect the customer’s natural thought process. This allows firms to nudge customers toward the information they genuinely need, reducing confusion, improving engagement, and ensuring that decisions better align with the customer’s own goals and preferences. This can enable customers to make informed decisions. Online choice architecture, the way digital journeys are sequenced and presented, is increasingly scrutinised by regulators. The CMA’s work under the Digital Markets Competition and Consumers Act 2024 reflects a growing expectation that firm’s design journeys which actively support, rather than undermine, informed decision making.
Online choice architecture may embed short interactive and sequential prompts during the purchase process (instead of detailing key information deep within documentation). For example:
- “Do you have any pre-existing medical conditions?”
- “Are you planning to participate in winter sports or adventure activities?”
If the answer indicates potential exclusions, the system could immediately explain how the policy applies in that situation. Visual scenarios could also help. Instead of stating that “certain medical conditions may not be covered,” the interface might present a simple example: “If you cancel your trip because of a condition you were diagnosed with before buying this policy, any claim you make may not be paid.”
This kind of design increases the likelihood that consumers understand the product before purchasing it, and the approach would contribute to meeting the CMA’s new standards for protection in digital markets (as highlighted in the Digital Markets, Competition and Consumers Act 2024).
Behavioural testing is key to confidence
An emerging practice highlighted in the FCA’s review is the growing use of testing. Some firms are beginning to evaluate whether their communications genuinely improve consumer understanding rather than simply assuming they do. Traditional compliance has often focused on whether the required information appears somewhere in a document. Behavioural thinking asks a more meaningful question: did the consumer actually understand it?
Testing might involve:
- running comprehension studies which ask consumers to explain key messages in their own words
- analysing digital journeys and online choice architecture to see where customers hesitate, abandon purchases, or request additional information
- comparing different versions of the same communication to identify which one leads to the best level of understanding.
Behavioural testing moves firms away from compliance based on documentation and toward evidence-based communication design.
Practical actions you can take now
To improve consumer understanding while supporting the translation of regulatory expectations into practical changes, leverage behavioural economics to provide a framework. It does not eliminate complexity from financial markets, but it does offer tools to manage that complexity in ways that align with observed consumer behaviour.
Practical actions you can take to uphold customer understanding include:
- Mapping the consumer decision journey and understanding how consumers actually make decisions
- Redesigning key communications for salience and making the most important messages the most visible
- Using behavioural testing before launch and as a tool in the product review cycle
- Simplifying product choices
- Monitoring customer behaviour after purchase (as understanding does not end at the point of sale).
Speak to Emma Wilson or Tom Middleton on behavioural economics, the Consumer Duty, or any other areas you’d like to discuss.
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Tom Middleton I am a quantitative economist in the economic consulting team with experience of leading technical economic projects in academia, the public sector and the private sector. A PhD economist by training, I utilise quantitative techniques to provide pragmatic answers to the causal and predictive questions that matter to clients.View Profile -
Emma Wilson I bring a valuable perspective to clients, combining my experience of working at regulators with my economic expertise.View Profile