Financial Services Authority

Consumer needs research: Informing our future work

July 2005

Financial Services Authority

Consumer needs research: Informing our future work

July 2005

Contents
Introduction ................................................................................................................1 An independent perspective on consumer behaviour ................................................2 1. Personal triggers: Moments when we might.......................................................4 2. External trends: The impact of the outside world..................................................7 3. Financial traits: Four sources of variation .............................................................9 Appendix 1: Research methodology........................................................................11 Appendix 2: Personal triggers and examples of events ...........................................13 Appendix 3: Use of incentives and deterrents to change consumer behaviour .......14 Appendix 4: Financial traits.....................................................................................15

Introduction
Many consumers do not find it easy to identify their financial needs, much less the appropriate products or services to meet those needs. One solution is to help consumers understand the existing market in all its complexity. Another approach would be to encourage market and regulatory behaviours that are well attuned to consumers, and so make it more likely that they will find it easier to take effective actions. In the second quarter of 2003 we commissioned research1 to help us better understand: how consumers come to identify a financial need; and how they approach the selection and purchasing of financial products to meet that need.

The purpose of this paper is to report the results of the research as an input to our programme of work to help retail consumers achieve a fair deal. The research is just one contribution to our wider retail strategy, which aims to: create capable and confident consumers who have access to clear, simple and understandable information on which to base financial decisions; encourage well managed and soundly capitalised firms to treat their customers fairly and offer appropriate products; and deliver risk-based regulation.

Our hypothesis is that a better understanding of how consumers navigate the financial services maze will enhance the way we think about the maze itself, and change the way we fulfil our responsibilities. The paper summarises the findings and offers some thoughts on how they might influence our future work. In particular, the way they might influence: how we communicate with and educate consumers; our regulatory approach; and our contribution to industry and policy debates.

Financial Services Authority July 2005

See Appendix 1 for details of research methodology.

An independent perspective on consumer behaviour

Many commercial firms undertake research on consumer behaviour to help them segment customers and target their marketing. We have discussed their work with a number of practitioners. By commissioning our own research, we do not presume that the FSA is better placed to find answers than other stakeholders. Rather, we have found we needed to ask different questions since our purpose is to understand underlying consumer needs and expectations of the market, without the industry imperatives of profitability. The firms we talked to about their findings and to whom we outlined our proposed approach, agreed that it would be interesting and different from the work they do.

Key findings
Consumer approaches to financial services are varied and complex. Attitudes and behaviours vary from individual to individual, and may change according to circumstance. Despite this, we have identified three major influences on consumers financial decision making. Our research shows that consumers recognise these as factors that are genuinely relevant to them. This consumer recognition is important, since we want to find ways to make financial services more accessible to consumers. Taken together, these three influences appear to explain most of what might pull a consumer away from or push them towards a financial decision, and some of the reasons for diverse consumer responses. They are: Personal triggers events in an individuals life that may prompt awareness of a financial need (e.g. the birth of a child, redundancy, moving home) or provide an opportunity to build awareness of a need. These events can be categorised into six major triggers: - Family - Leisure - Housing - Health - Occupation - Windfalls/Losses

External trends major external events that shape consumers views and levels of trust, and therefore affect their behaviour. These include government or industry initiatives or changes in economic climate. Sometimes such events are enough in themselves to cause consumers to act, but more often they feel overwhelmed by information and choice. In this situation, consumers are likely to fall back on the advice of trusted choice editors2. When government wishes to initiate a change in behaviour, they often issue a call to action. These are most likely to achieve a response where the consumers perceive there are elements of both carrot and stick. Financial traits underlying attitudes of each individual to financial decision making. Consumer attitudes vary along four important dimensions: planning (short-term vs. long-term); risk (high vs. low tolerance); engagement (disinterested vs. engaged); and decision making style (intuitive vs. data-driven).

Individual positions often change over time and in different contexts.

See Part 2 for examples of choice editors.

We know that consumers recognise all three influences as important factors in their financial decision making. The question for us is how we can best use this information. Our consumer financial capability work is the most obvious example, but there may also be implications for the way we regulate the retail market and supervise firms that are active in it. In this paper, we summarise our thoughts on the implications for the FSA and other stakeholders. We hope others will find this research helpful when they think about the retail financial services market and its regulation.

1. Personal triggers: Moments when we might

Consumers are most likely to identify a financial need (or be encouraged to do so) when triggered by an event in their life. A needs-based approach to advice and regulation, structured around six major triggers, may help to increase consumer engagement with financial services.

Key findings
A personal trigger is a strategic moment in someones life that may prompt them to enter or exit the financial marketplace. The research identified six triggers that consumers recognised as relevant to them. These were: family (e.g. marriage, divorce, new baby, elderly parents); occupation (e.g. new job, becoming self-employed, retirement); health (e.g. long or short-term illness, illness or death of someone close); housing (e.g. renting, buying, downsizing, renting out a room); leisure (e.g. holidays, travel, hobbies); and windfalls/losses (e.g. inheritance, gambling wins or losses, robbery).

Each trigger may be prompted by a number of different events, as above3. Triggers will vary for different people for example, the occupation trigger for one person might be promotion or further education, while for another it might be redundancy or retirement. All of us will experience multiple triggers over our lifetime as our circumstances change, but we don't necessarily experience them in the same order or at the same lifestage. Just experiencing a trigger event will not necessarily lead to action. A financial need may be present but people may not realise it, or they may identify the need but not know how to meet it.

What have we learnt?

The personal trigger categories are not surprising in themselves. Good financial advisers would recognise all of them. The chief benefit for the FSA is that we now have a robust classification that we know consumers intuitively understand, find meaningful and will respond to. It represents a core set that the FSA, firms and others could find useful as a checklist. Another important insight is that triggers represent opportunities to reach consumers in ways that they will understand and respond to. They are potentially a powerful tool for communicating with consumers, and for packaging consumer-facing messages. We should also be aware that the triggers represent warning flags of occasions when consumers may be particularly vulnerable.

See Appendix 2 for more examples of events.

How personal triggers might influence our work

Consumer communication strategy/financial capability
We have already begun to use this research in our financial capability strategy. The launch document Towards a national strategy for financial capability4 committed to a needs-based approach on the strength of this research. As a result, we have workstreams that build on the occupation and family triggers. In addition, the young adults workstream focuses on a time of significant change in people's lives, while the planning for retirement workstream addresses another period where needs change in a major way. In all the work we are looking to take advantage of the opportunities that are available for helping consumers to identify and address financial needs. The objective is to take financial services to consumers, rather than expecting consumers to come to financial services: for example, opening up discussion of broad financial planning in the context of debt advice or the workplace; and giving future generations a good grounding in financial matters before they leave school. In the future, as part of our consumer communication strategy, we might also consider: packaging information around specific triggers or events (e.g. buying a home, investing a lump sum); using needs-based language that consumers will relate to; and exploring a wider range of channels for delivering generic information and advice linked to needs (e.g. hospitals, health workers, employers, estate agents, family solicitors, funeral directors or youth centres).

Conduct of Business
We do not know how much we will want to take 'personal triggers' into account in our regulatory policy. But at this stage, we will want to consider whether our current regulatory structure puts unnecessary hurdles in the way of needs-based industry approaches. Over time, a needs-based financial capability strategy may drive demand for needs-based information or advice, possibly accessed through less familiar channels. For example, someone facing divorce might view their solicitor or marriage guidance counsellor as the logical first source of help. Similarly, the newly bereaved might initially be helped via hospitals and funeral directors. It is not our role to determine market structures. But as a regulator we want to ensure that, as far as possible, our regulatory structure does not put disproportionate regulatory hurdles in the way of these kinds of needs-based market developments. In due course, we may want to extend the basic advice philosophy to ease the access of consumers with straightforward needs to straightforward products. For example, it may be appropriate to apply different suitability tests when a consumer is seeking to invest a legacy, compared to a purchase intended to repay the capital on a mortgage or provide future income. A guided self-help approach could be developed to reflect needs; this might provide a spectrum of options from a fully comprehensive health check across all needs to specific product advice to meet identified needs. Information flows might also be driven by underlying needs. For example, periodic two-way disclosure between consumer and firm might be an appropriate way to check existing product portfolios are still suitable as the needs of the consumer change.

http://www.fsa.gov.uk/pubs/other/financial_capability.pdf

We are beginning a new project to streamline the Conduct of Business sourcebook, and plan to consider whether personal triggers might be relevant to this.

Training & Competence

A needs-based approach could also have implications for our training and competence requirements5, if information and advice are delivered through non-traditional channels. Advisers would still need to be competent across the products they offer, but we would want to avoid unjustifiable barriers to needsbased channels.

http://fsahandbook.info/FSA/handbook.jsp?doc=/handbook/TC

2. External trends: The impact of the outside world

Consumers are increasingly resistant to government and industry messages about their financial needs. They are most likely to take action when presented with both carrot and stick messages, or when given advice by someone they trust.

Key findings
External trends are events in the outside world that affect consumers attitudes to financial matters. These include government or industry initiatives, legislative changes, new distribution channels or changes in the economic climate. An external change may encourage people to seek advice or to purchase a financial product for example, the introduction of tax-efficient investments such as Individual Savings Accounts (ISAs). Or it may make them less willing to act for example, falling equity markets or confusion about new pension legislation. It is not always possible to link an external change directly to a specific outcome. Different changes may either reinforce or offset one another. Our research confirmed a development that many in financial services have already observed: consumers are increasingly resistant to government and industry messages as a result of declining trust, information overload, too much choice and perceived mixed messages from government. Many consumers are opting out rather than make choices in an uncertain environment. Given this, the key issue is how to get consumers to act. The research generated two clear messages for those seeking to influence consumers. Successful calls to action contain an element of both carrot and stick to influence consumer behaviour i.e. combining self-interest or financial incentive with some level of compulsion, financial penalty or other detriment, or the threat of enforcement.6 Consumers are turning to choice editors for financial advice, such as family, friends, media coverage, advice websites and independent financial advisers (IFAs). This is partly a trust issue, with consumers seeking advice from sources they trust (on financial or other issues) over that provided by financial institutions, and partly a search for short-cuts through the confusion of choice.

What have we learnt?

Consumers are definitely influenced by trends in the external environment, though individual consumers will respond differently to a given change. Low consumer trust in firms will not be overcome by indiscriminately throwing messages at them additional untargeted information is more likely to add to the confusion.

See Appendix 3 for campaigns using incentives and deterrents to influence consumer behaviour.

How external trends findings might influence our work

Consumer communication strategy/financial capability
The external trends research is primarily about influencing consumer behaviour, so has clear implications for the ways we seek to reach consumers of financial services. In the face of evidence that consumers are suspicious of industry promises and feel overwhelmed by choice, we need to consider what sticks and carrots might encourage greater consumer awareness and willingness to take financial decisions. And we need to decide which channels will be most effective for reaching consumers. Some specific approaches we might consider are: highlighting the benefits and penalties of different options more systematically, to create incentives for consumers to act; avoiding vague generic campaigns (which may just add to consumers sense of information overload) in favour of simple, targeted messages; and making greater use of those whom consumers turn to for advice (choice editors) to help us get FSA messages across whether they relate to financial capability building, consumer alerts or other calls to action.

Conduct of Business
We consider that the external trends findings are unlikely to have significant implications for our work streamlining the Conduct of Business Sourcebook. While our rules exist for the benefit of consumers, they work through their effect on firms' behaviour and are not directly concerned with changing consumer behaviour. However, the external trends research does provide a further analytical tool for use in future public policy initiatives, particularly in our cost benefit analysis and our assessment of proposed regulatory changes from the perspective of consumers.

Training & Competence

This material may be relevant in considering Training & Competence standards which encourage firms' staff to be aware of external trends, and to take appropriate account of them in their dealings with consumers.

3. Financial traits: Four sources of variation

Consumers approach financial matters in a variety of ways not captured by standard demographic segmentations. We may wish to encourage differentiated approaches to advice and communication rather than a one size fits all model.

Key findings
While personal trigger events and external trends are drivers of consumer behaviour, they do not explain apparent contradictions why some people respond to a personal trigger but others do not - or why consumers respond differently to the same external changes. Financial traits are underlying attitudes that shape the way a person thinks about financial matters at a given time. The research identified four dominant financial traits. Financial planning: the extent to which a person takes a long or short-term perspective when making financial decisions. Financial risk: the willingness of an individual to take on financial risk. Financial engagement: the level of interest in financial matters. Financial decision making: whether a person bases their financial decisions on intuitive factors such as trust, or by analysing data and options.

For any given trait, there is a spectrum of possible attitudes7. For example, some consumers are natural planners, others are natural hedonists spending today rather than saving for tomorrow. An individual consumer can have attitudes on all four dimensions simultaneously and independently. This may explain why consumer behaviour can appear perverse an individual may be highly engaged and rational, but still fail to make a decision because they are risk-averse and take a short-term perspective. It is important to recognise that individual traits are not set in stone; they may change over time or in different contexts for that person.

What have we learnt?

Consumer segmentations are widely used by the financial services industry for marketing purposes, and we believe it is also helpful for us to think about the varying needs of different groups for help and information. This research shows that consumers differ greatly in their approach to financial decision making in ways that are not captured in standard demographic or other commercial segmentations. Specifically, they vary in their willingness or ability to think about financial needs in a planned, longterm, economically rational way, and in their ability to understand and take on risk. A better understanding of the range of consumer preferences provides a useful starting point for further work, recognising that these are preferences rather than predictions.

See Appendix 4 for more detailed descriptions of each financial trait.

How financial traits might influence our work

Consumer communication strategy/financial capability
The findings suggest that we should think about adjusting our approach to information and marketing to ensure we connect with different types of consumer. Some options to consider are: borrowing from commercial marketing techniques to develop tailored campaigns for example, flagging messages as being for consumers who want to approach the decision in one way or other, and understanding what will appeal to people with different traits; and developing a layered approach that allows consumers to draw down only as much information as they find helpful or can cope with.

The most difficult challenge for us (and for industry and policy makers) is likely to be finding ways to engage those consumers who have a low level of interest in financial planning and/or take a short-term perspective.

Conduct of Business
Financial traits are already being incorporated into Conduct of Business regime through other work, such as Key Facts, which seek to ensure that information is given to consumers in a way that they are likely to engage with and understand. This thinking can be further incorporated into our simplification work. Some particular areas worth considering are as follows. Treating customers fairly FSMA requires that firms take account of the lack of financial understanding among retail customers. The financial traits work provides more precise ways of analysing the reasons underlying low engagement and/or lack of understanding. We should inform firms about this work to assist them with their responsibility to recognise and address the needs of consumers with different financial traits, and treat all their customers fairly. Information for consumers The findings indicate a number of questions worth exploring such as: how to explain true risk to the risk-averse, how to communicate complex options to less engaged consumers, and how to help consumers with short-term perspectives engage with the need for long-term planning. Fact find/advice process/product choice Questions we might want to consider here include: how to make this easier or more relevant for the financially disengaged, and how to ensure that more intuitive decision makers make appropriate decisions.

At a general level, this information may be helpful for firms to segment their own information and marketing efforts, and to review messages to see if they work for different types of consumer.

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Appendix 1: Research methodology

The consumer needs research was conducted in two stages by independent research organisations, supplemented by FSA discussions with key stakeholders, including academics, firms, consumer bodies and trade associations.

Stage 1: Developing preliminary framework

In the second quarter of 2003 we commissioned the Future Foundation to help us develop a preliminary view on the key influences on consumer behaviour. The Stage 1 research involved: background research to review existing research and models; a series of discussions with key internal stakeholders, including the Consumer Panel, Practitioner Panel and our own staff; and canvassing a selection of firms who have conducted research to understand their customers better.

Based on this work, we identified three core influences on consumers: personal triggers, external environment and individual behavioural factors.

Stage 2: Testing and validating framework

In January 2004, we chose The Henley Centre to help us test the hypotheses developed in Stage 1. This work was split into three separate strands: Personal triggers: testing whether the initial set of triggers had meaning for consumers and covered most life events and financial decisions. This work involved: focus groups with consumers in Manchester, Cardiff and London; in-depth interviews with consumers to create individual life maps; and interviews with industry experts, e.g. financial journalists, IFAs and representatives from highstreet banks.

External environment: examining the effect of external factors on consumers financial decision making, and of different attempts to influence consumer behaviour. This included: in-depth interviews with experts from the Treasury, commercial firms and industry bodies, nongovernment organisations such as Which? and the Citizens Advice Bureau, think-tanks and academic institutions; desk research based on academic studies and other reports; and reference to The Henley Centres own knowledge bank of research.

Behavioural factors: assessing the relevance of existing behavioural models and building a financial traits framework for financial services. This was a desk research exercise, drawing on the work of commercial marketers and academics. The Henley Centre examined a wide range of published academic and marketing studies, corporate literature and websites, academic dissertation archives and previous FSA research and analysis. Members of the academic community were consulted to ensure the most recent thinking was included.

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The detailed research outcomes have been published separately in the FSA paper entitled: Towards understanding consumers' needs. Copies of this paper can be downloaded from the research publications section of the FSA website8.

Additional stakeholder consultation

We also held a number of events with key stakeholders to test and debate emerging conclusions from Stage 2 including: a workshop with a panel of academics and key opinion formers in February 2004 (co-hosted with Future Foundation); an internal briefing for FSA Retail Directors, Heads of Departments and supervisors (presented by The Henley Centre) in April 2004; and a half-day seminar for key external stakeholders (representatives from firms, EU/Government bodies, consumer/trade associations, FSA Panels and academics) in May 2004.

http://www.fsa.gov.uk/Pages/Library/Other_publications/Consumer/index.shtml

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Appendix 2: Personal triggers and examples of events

Family Marriage Divorce Having children School trips Children start university Children leave home Become a grandparent Parents enter care Death of parent(s) Housing Rent (with view to buy) Buy first home Upgrade Buy to let Change lenders/re-mortgage Do home improvements Downsize Pay off mortgage Resettle or emigrate

Occupation First job Change employers Promotion Made redundant Become part-time Become self-employed Relocate Return to education Retire early

Leisure Save for a new car Save for holidays/ travel Save for Christmas Upkeep of car Pay for driving lessons Spend on hobby

Health Short-term illness Long-term illness Disability Dental treatment Someone close falls ill or dies Become primary carer Change appearance Plan funeral

Windfalls/Losses Inheritance Retirement lump sum Redundancy payment Win lottery Cash gift Tax refund Gambling wins/losses Litigation about money Get into debt

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Appendix 3: Use of incentives and deterrents to change consumer behaviour

The research looked at direct attempts by government and others to influence consumers. Successful campaigns usually combined both carrot (incentives) and stick (deterrents).
Initiative Compulsory employer-funded pensions (Australia, Chile, Argentina) Incentivising savings (Ireland: Special Savings Incentives Account) AIDS/HIV awareness campaign (1988-94) Drink driving and seatbelt safety campaigns (1980s onwards) Perceived impact Incentives of new behaviours Deterrents to old behaviours Fear of insufficient income in retirement due to inadequate state pension Compulsory All employees covered High around twothirds of Irish workforce have an SSIA High 90% awareness of virus (up from 24%), increased condom sales High two-thirds reduction in drink driving deaths Build a nest egg with government help. An additional 20% added to each fund (1 for every 4 saved) High level of protection if simple, cheap solution (condoms) adopted Increased personal safety Fewer road deaths Avoid guilt/moral censure Privatisation campaigns e.g. Tell Sid (mid-1980s) Direct debit information campaign (1985 97) Look after your heart campaign (1987-93) Anti smoking campaign (2003) High share issues over-subscribed High rewards for very little risk Fear of illness/death Unprotected sex becomes socially unacceptable Compulsory belt wearing Personal safety fears Drink driving becomes socially unacceptable Tougher controls and fines One-off opportunities One-off opportunity, available only for 12 months

High most workers Additional income in now covered, though retirement some issues regarding Employer funded fees and returns All employees covered

High 72% of adults using direct debits (up from 14%) Negligible possibly due to mixing three woolly messages High good take-up of information and support by those wanting to stop smoking, fewer new smokers

Cheap, reliable and secure bill payment Save time/convenience Improved health and life expectancy Improved health and life expectancy

Cost and security disadvantages of other bill payment methods Impact of injudicious eating, drinking and smoking on health Effect of smoking on arteries/internal organs Taxation Smoking becomes socially unacceptable

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Appendix 4: Financial traits

Short term

FINANCIAL PLANNING

Long term

Tend to make financial decisions quickly with little thought for long-term consequences. Want to know Whats in it for me now? Point-of-sale information has greatest impact.

Want to know longer-term benefits and risks. Seek comprehensive information before making decision. Appreciate financial planning tools (e.g. online calculators).

FINANCIAL RISK Risk averse

Will not knowingly expose themselves to the chance or risk of financial loss (though may not have sufficient knowledge to appreciate the true risks of different financial products).

Risk tolerant
Are willing to take financial risks in the hope of achieving favourable outcomes, and to tolerate some losses.

Disengaged

FINANCIAL ENGAGEMENT

Engaged

Are disinterested in and/or fearful of personal finance. Tend to lack understanding of financial offerings, and disinclined to learn more. Prefer simple explanations without jargon or complex descriptions.

Are interested in and knowledgeable about financial services. Wish to manage their own finances, view as hobby not chore. Seek out relevant information. Enjoy using tools.

FINANCIAL DECISION MAKING Intuitive

Tend to make financial decisions based on intuitive factors such as instinct, trust, brand or recommendation. Seek reassurance, need to feel decision is right one for them.

Data-driven
Tend to use logical, information-heavy approach (e.g. weighing up pros and cons). Focus on facts and figures so that they can easily compare different offers. Need to know they have considered all options.

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ISBN: 0117042862

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