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Can regulators stop data exploitation?

14 October, 2019Ouida Taaffe

Ouida Taffe looks at data, bias and regulation of the markets. Reporting from the Behavioural Exchange Conference, she examines whether firms are developing new ways to exploit our biases faster than regulators can react.

pc-screen-with-dataBehavioural economics has been fashionable for nearly a decade, but its real moment may be yet to come. There are two inter-related reasons for this.

First, as policymakers debate the limits of central bank powers to kickstart the economy – and calls for fiscal intervention increase – behavioural economics can bring empirical insights that are much more nuanced than those of macro-economic theories.

Second, as ever-more data is collected and analysed – often in real-time – those insights will improve. Institutions can now form answers to questions that were once unknowable. A life insurer, for example, can collect data on an individual client’s health – and also price the premium both to cover risk and to change behaviour.

The future of regulation

That ability to ‘nudge’ is, of course, not necessarily benign. The panel on ‘the future of regulation’ at the Behavioural Exchange Conference at the start of September examined whether firms are developing new ways to exploit our biases faster than regulators can react.

It takes “a very long time” for regulators to respond when the next exploitative practice emerges, said James Plunkett, Executive Director of Advice and Advocacy, Citizen's Advice.

One of the reasons for that, he said, was that it is increasingly hard to distinguish between what is exploitation of human biases – such as encouraging inertia in switching financial services accounts – and what is a tempting marketing offer.

That is problematic for individual consumers, but also has far wider and more troubling implications. Plunkett argued that “public faith in a good outcome from markets is falling”.

Using data to shape regulation

Dr Karen Croxson is Head of Research and Deputy Chief Economist at the Financial Conduct Authority (FCA). She said that “the motion does touch on a genuine concern” because firms have a lot of data and expertise and vulnerable people, in particular, can face a lot of risks.

However, she believed that the battle was not one-sided and that regulators can also use data to further their aims. They could, for example, “identify harm scientifically”. She pointed to the cap on payday loans as an example of using hard evidence to inform policy and protect the vulnerable. She also argued that data might, in the future, allow regulators to predict the risk of consumer vulnerability.

Dr Stefan Hunt – Chief Data and Technology Insights Officer at the Competition and Markets Authority – also argued that the consumer position may not be as bad as people fear.

He pointed out that regulators have the legal powers to put together “unique” datasets and can take “strong action” to correct market abuse. He also argued that the social mission that regulators have allows them to attract a quality of talent that is “surpassed only by [that] in big tech”.

“We need to be balanced about what is going on in firms,” said Hunt. “Few people wake up wanting to exploit…Also, many firms are not as advanced as people think. They are not using lots of data – let alone using it to exploit consumers.”

A bias towards exploitation?

Plunkett, at Citizens Advice, on the other hand, believed that the market as it stands incentivises firms “to cause detriment”. He said there is a structural problem of “having to rip off customers because everyone else is doing it”.

The audience vote on the overall debate came down firmly on the side of Citizen’s Advice. And it was clear that the regulator would also like to see a more socially-orientated mindset in the markets.

Croxson said that the FCA has started work on examining “how culture arises and how a good culture can be brought to bear”. 

More Insights on data and behaviour

How big data is changing the role of banks and banking

Emotions vs algorithms: How much does human nature influence investment decisions

See our Centre for Digital Banking and Finance