Watchdog to protect ‘irrational’ investors

Financial Times
January 24, 2012

Investors cannot be counted on to make rational choices so regulators need to “step into their footprints” and limit or ban the sale of potentially harmful products, the head of the UK’s new consumer protection watchdog said on Tuesday.

In his first big interview since starting work last autumn, Martin Wheatley told the Financial Times that the 2008 financial crisis had fundamentally reshaped regulators’ assumptions about the people they protected.

“You have to assume that you don’t have rational consumers. Faced with complex decisions or too much information, they default ... They hide behind credit rating agencies or behind the promises that are given to them by the salesperson,” said Mr Wheatley, a key figure in the government’s effort to revamp financial regulation.

Under the government’s plan to break up the Financial Services Authority, the FCA, headed by Mr Wheatley, will spin out as an independent agency early next year and be granted enhanced powers to police markets and protect investors. It intends to be far more interventionist in an effort to head off the mis-selling scandals that have dogged the financial sector in recent years.

The new approach rests on research in behavioural economics that shows investors often make decisions contrary to their own interests because of their aversion to losses or unwillingness to ditch a losing strategy. It represents a profound shift in regulatory stance.

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