*This post is written by Sasha Tregebov, Director, Behavioural Insights Team Canada and Brianne Kirkpatrick, Principal Advisor, Behavioural Insights Team Canada *

  • The problem: Regulation is all about encouraging or discouraging certain behaviours, but even leading regulators are merely scratching the surface of what behavioural science has to offer.

  • Why it matters: As a result, regulators are limited in their ability to proactively achieve compliance targets and other key regulatory policy outcomes.

  • The solution: Regulators can systematically deploy behavioural science across five use cases: effective disclosures, proactive compliance interventions, reduced regulatory burden, enhanced enforcement, and better rules.

Regulation is vital to protecting people and our planet. But simply creating new rules is insufficient to achieve regulatory goals; even when enforcement tools like penalties and inspections are added, compliance often lags.

That’s because human behaviour is complex and nuanced. Incentives like financial penalties matter, but how they are structured and communicated can make a big difference. More broadly, when rules aren’t designed to work with the ways people make choices, those rules are much less likely to achieve their policy goals.

“for the information to translate into better outcomes, disclosures need to be clear, timely, salient, and oriented to action”

Behavioural insights (BI) is helping regulators engage with the complexity and nuance of human judgement to generate better outcomes. It’s an approach grounded in behavioural science, which applies evidence about how and why we act the way we do to practical problems like regulatory policy and compliance.

Taking a behavioural insights approach to regulation can help improve disclosures, compliance outcomes, and enforcement tools while limiting or reducing administrative burdens. It can even help write better rules.

Many regulatory agencies across industries are already using behavioural insights to address their everyday challenges. Read on for real-life examples and to learn about where more innovation can be found.

How regulators are using BI today

**Enhancing consumer protection through better disclosure. **

More information can help consumers, investors and employees make better decisions for themselves. But for the information to translate into better outcomes, disclosures need to be clear, timely, salient, and oriented to action. Our organisation, the Behavioural Insights Team (BIT), has helped regulators across the world develop and scientifically test disclosure options. We partnered with the Australian Energy Regulator to redesign the basic leaflet that told consumers about their energy plan. Our insights helped customers pick the least expensive energy option for their needs more often. With the Ontario Securities Commission, we showed how to help investors better understand their fees. It’s not just BIT. Regulators like the Financial Conduct Authority in the UK have been at the very forefront of integrating behavioural insights into the design and updating of disclosures.

Improving disclosures are the most common and well-established way to apply behavioural insights to regulation, but it is only the starting point.

**Proactively encouraging compliance. **

Regulators tend to rely on inspections and penalties (or prosecutions) to ensure compliance. These measures are essential. However, they tend to be costly and often take place only after a violation or complaint has occurred. Proactive compliance communications address this limitation and can also be informed by behavioural science.

For example, in Chattanooga, TN, BIT and city staff proactively wrote homeowners with previous property code violations, providing guidance on how to avoid future violations. The postcards we sent them used powerful behavioural tactics like personalisation and “indirect reciprocity,” and they decreased subsequent violations by about 9%.

**Reducing regulatory burden. **

Regulatory compliance often involves administrative requirements. For example, data must often be provided to regulators through prescribed forms. While these administrative requirements can be important for monitoring and accountability, they are often far more complex or cumbersome than they need to be. Forms that require more information than is needed, are hard to understand, or challenging to access create frictions, small barriers to completing an action, that needlessly increase regulatory burden while decreasing compliance.

A foundational principle for applying BI is that if you want to encourage a behaviour, make that behaviour as easy as possible. For example, a change as simple as removing a click from an online process can increase compliance (see Box 1.2 in previous link).

In Canada, BIT partnered with the Financial Services Regulatory Authority of Ontario (FSRA) to create new enterprise standards for regulated forms. These include requirements related to duplicate data requests, reading level, signposting, and structure. By developing and implementing better forms, FSRA and the entities it regulates can focus on their core business: protecting the rights of consumers and offering high-quality financial services, respectively.

"The greatest impact will come from adopting a behavioural insights perspective when developing the regulations themselves."

What next? Innovative opportunities for regulation and BI

**Improving enforcement. **

While we advocate for going beyond traditional enforcement mechanisms and exploring proactive compliance strategies, there is no doubt that inspections, audits, penalties and prosecutions will remain a critical part of the regulatory landscape. BI can improve the efficiency and efficacy of these tools.

Australia’s Fair Work Ombudsman has pointed toward one important direction: more helpful auditing and inspections. They trialled a new approach to auditing small business compliance with labour laws, providing business with post-audit reports that used concepts from behavioural insights like social norms, planning prompts, and salient key message banners. Rigorously evaluated, these measures reduced future noncompliance by over 40%.

BIT itself has done work on communicating penalties more effectively. Our work on tax payments in Guatemala demonstrated the power of framing non-compliance as a deliberate choice, rather than an oversight. (This was designed to overcome status quo bias among firms that had long been non-compliant.)

Beyond offering more effective post-inspection guidance, we encourage regulators to use behavioural science to answer questions like “What penalties are most (cost) effective in shifting the behaviour of regulated entities” and “When are inspections most effective in creating new patterns of behaviour.” A recent paper by Kinneret Teodorescu and several coauthors points in a promising direction, finding that the frequency of regulatory penalties is more important than the severity of penalties in reducing future violations.

**Writing better rules. **

Behavioural insights can be used to enhance existing policies and processes. But there’s no reason to stop there. The greatest impact will come from adopting a behavioural insights perspective when developing the regulations themselves.

By thinking through questions like the ones below from the earliest stages of issue identification, regulators and legislators can improve the effectiveness of new or revamped regulation:

  • What specific behaviours need to shift in order to achieve the policy objectives? Whose behaviours?

  • How are people’s cognitive processes and decision-making environments limiting or enabling these behaviours?

  • How effective are traditional disincentives and enforcement mechanisms likely to be? How can they be complemented by non-regulatory initiatives (e.g., proactive communications)?

These are questions that behavioural scientists can help regulators navigate. There is strong evidence and useful theory to answer these questions and write better regulations in the first place.

👋 You can create a post like this one! Share your thoughts with a community of public servants. Learn more

(Image Credit: Unsplash)