UK Financial Conduct Authority: “We are committed to encouraging debate among academics, practitioners and policymakers in all aspects of financial regulation. To facilitate this, we publish a series of Occasional Papers in financial regulation, extending across economics and other disciplines. As demonstrated in our Occasional Papers 1 and 2, we have been exploring practical ways of using behavioural economics to improve our regime. As part of this exploration, this paper discusses the pros and cons of using behavioural experiments in creating regulatory policy. It finds that these experiments have an important role to play, often providing insights into the way markets work that may not be possible to obtain otherwise. The paper illustrates this by describing an innovative experiment developed for the FCA’s first competition market study, which examined how consumer behaviour is affected when general insurance is sold as an add-on product to a primary purchase. The paper also describes the results of this research, which show that the ‘add-on mechanism’ weakens consumers’ ability to discipline firms by shopping around and comparing products effectively. This in turn has implications for possible remedies.
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