The British (Financial Regulatory Principles) Are Coming!

Regulation of financial products and services in the U.S. historically has relied on rules-based regulatory policy, governing business processes including disclosures relating to terms, pricing, structure and marketing. The U.K. has been a leader in applying principles-based regulation, which governs conduct at a higher level of generality. Over the past few decades, researchers in cognitive psychology and behavioral economics have produced a body of findings that are beginning to fundamentally alter understandings of what regulation should do, particularly with respect to the design of consumer “nudges.”

A nudge is a change in how a choice is presented, which leads people to make a more desired decision from a regulatory point of view. Nudges relevant to regulatory policy include, for example, the presentation of disclosures and the setting of default rules (what happens if consumers do nothing). “Choice architecture,” or how the options are framed, has a great deal to do with outcomes.

Originally Published on Law360, New York - April 11, 2014.

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