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Australia – ASIC Signals Its Intention To Increase Its Focus On Behavioural Economics.

19 March, 2015

 

Legal News & Analysis – Asia Pacific – Australia – Banking & Finance

 

What You Need To Know

 

  • ASIC has clearly signalled its intention to increase its use of behavioural economics across its regulatory business, commencing with a behavioural economics-based analysis of two areas: hybrid securities and communications with directors of companies in liquidation.
  • Behavioural economics is a concept that is already widely used by the UK’s Financial Conduct Authority and has resulted in a number of changes to the way regulated firms are able to market their products and services in the UK.

 

What You Need To Do

 

  • If you have any questions about behavioural economics please contact us.

 

Background

 

ASIC has recently signalled its intention to increase its use of behavioural economics principles. ASIC has indicated that it is committed to applying such principles to identify consumer problems and to detect firms taking advantage of consumer biases. This reflects the approach which has been taken by the UK’s Financial Conduct Authority (FCA) in this area which has resulted in significant changes in relation to how UK regulated firms are able to sell and market their products and services.

 

Application Of Behavioural Economics By ASIC

 

On 18 March, ASIC released two reports in relation to behavioural economics research experiments which it commissioned to explore:

 

  • possible behavioural biases impacting consumer decisions about investing in hybrid securities; and
  • how to improve ASIC’s communication with directors of firms in liquidation to increase their compliance with the law.

 

ASIC Chairman Greg Medcraft stated that these studies will be used to “provide valuable insights into how people make decisions and how ASIC can improve outcomes,” giving a clear indication that there will be further developments in this area.

 

The FCA Approach

 

Behavioural economics looks at the way human behaviour can be exploited. This has been a key focus of the FCA over the last year which has used behavioural economics to turn the established concept of ‘caveat emptor’ on its head and instead pass responsibility to firms for ensuring that they use behavioural economics to steer customers towards the best and most suitable products/outcomes for them rather than the product that is most profitable for the firm.

 

The FCA does not consider that disclosure at the point of sale absolves the seller from responsibility for ensuring that the product or service represents a good outcome for the customer and therefore behavioural economics has resulted in the erosion of the effectiveness of pre-contract disclosures and disclaimers which were once heavily relied upon.

 

Behavioural economics has also provided a platform for the FCA’s new interventionist approach and has meant that traditional marketing tools, such as honeymoon rates and add-on products where thecustomer has to actively ‘opt-out’, are no longer acceptable.

 

The FCA has been leading the field in relation to its work on behavioural economics and accordingly any regulated institution that wishes to ensure it is well placed to comply with these proposed requirements in Australia can obtain a good indication of what is and is not likely to be acceptable from the standards that have been imposed in the UK.

 

The FCA has also been evangelising on this topic to other regulators such as ASIC.

 

Implications In Australia

 

The Final Report of the Financial System Inquiry recommended that there be improved scope for issuers in Australia to create more accessible disclosure documents that are better signposted, use plain English and graphics and can improve consumer understanding. Further developments in this area are therefore likely.

 

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For further information, please contact:

 

Jonathan Gordon, Partner, Ashurst

jonathan.gordon@ashurst.com

 

Corey McHattan, Partner, Ashurst

corey.mchattan@ashurst.com

 

Anne Mainwaring, Ashurst

anne.mainwaring@ashurst.com

 

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