The Financial Conduct Authority’s (FCA) latest targeted support proposals are missing a “critical dimension” by failing to consider the impact of consumer behaviour, Oxford Risk head of behavioural finance, Greg Davies, has argued.

Speaking to Pensions Age, Davies warned that while the plans, confirmed by the FCA in June, have the potential to be transformative, tackling pensions disengagement is only part of the challenge when the real issue lies in understanding how consumers actually behave with their money.

Davies said that although the idea of considering behavioural responses is already complicit in the Consumer Duty, he wants the FCA to make this “more explicit”.

“The FCA talk a lot about the need for the target to be right, and they reference behavioural ideas, but when they describe a target, almost exclusively they talk about financial characteristics,” he said, arguing that there should be consideration and ideally measurement of standard dimensions of behaviour when mapping these solutions.

“Once you take into account different behavioural attitudes, you can narrow down their solutions, which makes people much more likely to act,” he claimed.

Davies also noted that the current approach to retirement advice is based purely on financial variables, which runs the risk of “getting it badly wrong”.

“I could take two individuals who have absolutely identical financial situations, but if one is highly impulsive and one is not, it completely changes the right advice to give him, and how it should be communicated,” he explained.

“The impulsive person is less likely to stick to their spending plans, so they face greater longevity risk and greater sequencing risk problems.

He added that sometimes, even if the advice is the same, the communication should be different.

“Our fear is if this doesn’t happen, you’re genuinely going to give people the wrong answer, leading to detrimental outcomes.”

Echoing these concerns, Legal & General (L&G) head of behavioural finance, Jenny Hazan, said that “deep behavioural insight” into UK pension savers is crucial to driving better engagement at scale.

Speaking at the Pensions UK annual conference, Hazan acknowledged that “most people aren’t engaged with pensions”, stressing that the issue goes beyond perceptions of complexity.

Elaborating on this, Davies highlighted that the biggest behavioural differences in financial decisions related to risk tolerance, impulsivity, composure, confidence, spending reluctance (FORO), emotional attachment to property, as well as the rising prevalence of impact desire and familiarity preference.

In addition, he pointed out that while the FCA has talked a lot about vulnerability, it has not yet addressed behavioural vulnerability.

“In targeted support, they talk about excluding people from targeted segments who are vulnerable, as the solution may be dangerous for them,” he said.

"But what they have not addressed is not just being financially or health vulnerable, but other behavioural vulnerabilities.

"These people may be financially well off but still in serious danger of making poor decisions,” warned Davies.

The FCA’s targeted support proposals, set out in consultation paper CP25/17, aim to create a new regulated service designed to bridge the gap between unregulated guidance and full financial advice.

Ahead of its latest consultation, the FCA emphasised that it wants to help firms that wish to provide targeted support to get ready “quickly”, consulting on additional changes to its handbook rules to ensure the proposals work effectively alongside existing requirements.

While the industry has been broadly supportive of the plans, The Investing and Saving Alliance (TISA) has urged the FCA to reconsider some of its proposed changes, warning that these could cause confusion, erode consumer confidence, and create unnecessary operational challenges for firms.

In particular, TISA raised concerns about the FCA’s proposed mandatory signposting requirements for pension communications and its approach to remuneration disclosures.

The FCA has acknowledged that there were areas where respondents suggested changes, confirming that it will respond to this feedback in its policy statement, expected in December.

Davies, whose company has set out its concerns in its consultation response, concluded that behavioural understanding should be considered alongside financial variables when designing consumer segments and communications, to ensure the framework truly reflects how people behave with their money.

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