For decades, financial regulation assumed a simple premise: give consumers enough information, and they'll make the right choice. Behavioural economics has quietly dismantled that assumption and in doing so has reshaped how the FCA regulates general insurance and consumer credit.
The problem with "informed choice"
People don't compare products the way economic textbooks assume. Present bias means we overweight today's convenience against tomorrow's cost — think Buy Now, Pay Later, or underinsuring because premiums feel like an immediate loss for an uncertain future benefit. Inertia keeps customers on renewal after renewal rather than shopping around. Overconfidence leads borrowers to assume they'll repay before interest kicks in. And framing how information is presented shapes decisions more than we'd like to admit.
None of this requires a firm to lie or mislead. It just requires a firm to understand these patterns and design around them, which is exactly where things go wrong. Practices like price walking (charging loyal renewal customers more than new customers) or promotional rates that quietly convert to high standard pricing don't break disclosure rules; they exploit predictable psychology.
From disclosure to outcomes
This is the thinking behind the Consumer Duty, in force since July 2023. It shifts the regulatory question from "did we tell them?" to "did they actually understand, and did they get a fair outcome?" Firms must test whether communications work, design products around genuine target-market needs, and remove friction from cancelling or complaining — while deliberately adding friction before high-risk decisions like increasing debt or dropping cover.
Where it gets ethically tricky
The same tools that help consumers can just as easily be turned against them. A default that nudges someone toward paying off their balance in full is a positive nudge. A pre-ticked box for add-on insurance is exploitation of the same bias. The paper draws a hard line around "dark patterns" and "sludge" (deceptive design and deliberately introduced friction) arguing that exiting a product should never be harder than entering one.
The bottom line
Behavioural economics isn't a replacement for sound product governance, as it can't fix a product that's simply unaffordable or poorly designed. But it is now central to how compliance teams have to think: about wording, defaults, journey design, and the data (complaints, cancellations, persistent debt) that reveals whether customers are engaging or just drifting along on inertia.
To understand more about how consumers make economics decisions, download ITC Compliance's full report on The Psychology of Compliance by completing the form below.
