Behaviourally Informed Policies – CVM Financial Education and Investor Behavior Conference

Rio de Janeiro - 07/12/2015

The reduction

of systemic risk

Ensuring that markets are fair, efficient

and transparent

The protection of investors

Regulation Supervision Education**

*Objectives and Principles of Securities Regulation. IOSCO.

**Investor Education in Canada: Towards A Better Framework. Caroline Cakebread.

SECURITIES REGULATION OBJECTIVES* AND INVESTOR PROTECTION**

Behaviourally Informed Public Policies and Interventions

LEGAL MANDATE

Investor protection Protect investors against (i) irregular issuance of securities, (ii) illegal acts of administrators, (iii) insider traders Prevent or discourage modalities of fraud or manipulation Ensure fair trade practices and a proper disclosure

Supervision and enforcement

Permanent oversight of activities and services in the market place Investigative proceedings and imposition of penalties

Promote market development

Balance between market initiatives and investor protection Foster the formation of savings through securities markets

A consistent financial education policy

INVESTOR AND FINANCIAL EDUCATION

Objectives: Raise population awareness about long-term savings and investment opportunities, as well as its risks and advantages Sustainable expansion of market boundaries Dissemination of a long-term investment culture

Point of attention:

Increase of life expectancy requires profound changes in population habits concerning savings and investments Lack of a long-term savings culture may trigger a high social risk

Need to properly comprehend investors’ attitudes and behaviours Key decision following the 1st edition of Annual International Conference of Investor Education and Financial Behaviour, in Rio (2013)

Set up of a Behavioural Sciences Advisory Panel – NEC

Antecedents> Schools FE Evaluation Dimensions: Cognitive, Attitudinal and Behavioral

• “Think before acting” Reflexive Autonomy

• Autonomy in the face of others Emotional Autonomy

• Ability to make decisions independently and to follow through on these decisions with actions

Functional Autonomy

*APPLICATION OF THE CAED AUTONOMY SCALE TO ASSESS THE IMPACT OF FINANCIAL EDUCATION . Micarello,

Hilda; Melo, Manuel Palacios, Burgos, Marcelo B.

• Financial Literacy Test > financial proficiency scale.

• Behavioral Questionnaire: to measure actual financial behaviors and future financial attitudes and behaviors (intention to save) > 2 scales:

• (1) Autonomy scale for financial matters (tridimensional)**:

**NOOM, M. J., Dekovic, M., y Meeus, W. (2001). Conceptual analysis and Measurement of Adolescent Autonomy. Journal of Youth

and Adolescence, 30, 5, 577-595.

*Predicting and Changing Behavior – The reasoned action approach. Fishbein, M.; Ajzen, I. (2010)

Behavioral Questionnaire (cont.):

• (2) Intention to save: theoretical model > Theory of Planned Behavior (TPB). TPB was introduced in 1967 (Theory of Reasoned Behavior - TRB), motivated by the fact the then existing attitude theories could not predict behavior. Objective: PREDICT and UNDERSTAND human behavior. Subject areas: weight loss, alcoholism, consumer behavior, voting, financial services etc.

• Combines several cognitive predictor variables.

• “In my opinion, saving money is …”

Attitudes towards future behavior

• “My family/friends has the habit of saving…”

Subjective norms and expectations

• “I believe I can save …” Perception of

controlling one`s behavior

Intention Behavior

Impact Evaluation Dimensions: Cognitive, Attitudinal and Behavioral

The impact of the pilot project on student’s financial knowledge was statistically significant.

Significant increases on financial autonomy scores and intention to save were found.

Students improved their savings and spending behaviors (making a list of expenses, % of income saved etc.).

The FE in schools program has the potential to increase national saving rates.

RESULTS

2023

Building the 2023 CVM:

New Communication Channels (Investors give voice to their feelings, opinions etc.)

Strengthen Investor protection and Better Serve the Investors.

“Behaviorally Informed Policies”

Promote Capital Market Research

National Alliance for Investor Education.

Strategic Goal 13: Promote financial education, contributing to a better understanding by investors of the benefits and risks associated with financial products.

BEHAVIOURAL SCIENCES ADVISORY PANEL - NEC

Interdisciplinary, independent advisory committee created in early 2014

Economic, social, neuroscience, cognitive psychology experts (professors and senior researchers), working on a voluntary basis

NEC aims to help CVM to apply behavioural economic insights to improve the effectiveness of educational projects and public policies Main attributions:

Review and endorse CVM projects Advise CVM on scientific matters Provide guidance to the CVM’s Office of Investor Protection and Assistance (SOI)

In order to support NEC activities, the Board of Commissioners set up a Behavioural Sciences Unit (COP) at the Office of Investor Protection and Assistance.

INVESTOR PROTECTION AND EDUCATION

SOI Office of Investor Protection

and Assistance

GOIs Investor

Assistance Units

Provide guidance to investors and answer to consultations and complaints

COE Financial Education

Unit

* Implemented in 2014

COP Behavioural Sciences Unit

Financial education projects and programs

SOI – Superintendência de Proteção e Orientação aos Investidores GOI – Gerência de Orientação aos Investidores COE – Coordenação de Educação Financeira COP – Coordenação de Estudos Comportamentais e Pesquisa

Educational Center**

** To be implemented in 2016

BEHAVIOURAL SCIENCES UNIT - COP

Demand Planning Execution Use of

findings Publication / Disclosure

Definition of

scope, objectives,

target audience

Draft of project,

with technical

support of NEC,

if necessary

Mostly through

agreements,

partnerships

Educational

programs

Rule-making (i.e.,

crowdfunding

research)

Annual International

Conference

Blog (Penso, Logo

Invisto?)

Facebook profile

Budget constraint

Optimization of available resources, tools and data

Simple, bold and efficient measures

Evolving into a full scale “Nudge Unit”, using cognitive insights on behalf of investors Objectives:

Comprehend investors’ decision-making process Develop methodologies and proceedings to estimulate formation of savings and its investment in securities Evaluate the impact of educational, guidance and assistance actions Subsidize financial education programs and rule-making process

Methodologies being considered:

Investors surveys Small-scale tests Randomized controlled trials Adaptation of successful initiatives in other markets to Brazilian market characteristics Use of behavioural insights

BEHAVIOURAL SCIENCES UNIT - COP

2015 COMPLETED PROJECTS TOP Programme Crowdfunding Survey

Publication

OBJECTIVES

Evaluate possible changes in the risk profile and perception of investment decisions of the group of university professors who attended the TOP Programme

Assess the efficacy of TOP Programme in the creation of knowledge

Observe eventual relations between personality traits and risk/investment profiles

About TOP Programme:

Qualification program (in its 16th edition – since 2006) focused on university professors who teach financial market-related subjects

Taught by representatives from the CVM, ANBIMA, BM&FBOVESPA, CETIP and other SRO´s embracing topics like:

Capital Markets regulation, stock market functioning, clearing, listing segments, market intermediaries, IPO’s, follow-ons, tender offers/takeovers, stock analysis, governance, derivatives, fixed-income instruments, mutual funds etc.

METHODOLOGY

Quantitative survey with the 39 university professors who attended the last TOP Programme edition, before, during and after the Five-Day course (July, 2015)

Target audience of knowledge multipliers

Study carried out at very low cost, using an existing CVM educational program

TOP PROGRAMME

INVESTMENT PERCEPTION (FINDINGS)

Participants were asked, before and after the Programme, about their impressions on each investment product (i.e., safety, risk-return, liquidity)

Main perception indicates that there was a preference for saving accounts due to (i) low-risk, (ii) simplicity to understand and to invest in, and (iii) low initial investment amount

However, the Programme achieved some positive results, clarifying aspects of securities:

1522

Before After

Consider stocks as a highly liquid investment

1218

Before After

Consider fixed income mutual funds as highly

liquid investments

3

10

Before After

Consider REIT’s as easily understood

investments

TOP PROGRAMME

SELF-REPORTED KNOWLEDGE (FINDINGS)

The Programme improved the overall self-reported knowledge of investment products, especially securities

Overall averages Before = 3,37 After = 3,67

TOP PROGRAMME

LEVEL OF INTEREST IN SECURITIES (FINDINGS)

The Programme also generated more interest in securities (i.e., mutual funds, derivatives, REIT), reducing the level of interest in simple savings account:

27,4

%

16,1

%

10,4

%

10,3

%

8,0%

7,0%

6,9%

3,4%

3,3%

2,3%

1,5%

1,4%

1,4%

0,3%

0,3%

26,6

%

17,0

%

10,8

%

7,8% 8,

7%

6,5%

5,0%

4,2%

4,3%

4,0%

1,0%

0,0%

3,2%

0,7%

0,1%

Before

After

If you had R$ 1 million, how would you distribute this amount among the investment products? (average of all respondents)

TOP PROGRAMME

CONCLUSIONS The initiative relatively succeeded in:

Increasing the participants’ awareness about investment products (notably securities) Developing the participants ’ perception concerning some key aspects of securities Generating more interest in securities, probably turning to future investment intention, particularly considering that the participants are knowledge multipliers

TOP PROGRAMME

CROWDFUNDING

OBJECTIVES

Study investors preferences and opinions concerning crowdfunding (particularly equity crowdfunding)

Understand the profile of interested investors

Provide subsidies to a specific rule to be issued by CVM

METHODOLOGY

Conduction of a quantitative survey with investors who accessed the CVM ’s investors assistance service (SAC) in our website

Questionnaire sent by email covering relevant issues about the theme:

Level of interest Investment amounts and favorite segments to invest Expected returns Main concerns (fraud risks, business failure, lack of transparency)

LEVEL OF INTEREST

The results indicate there is a high level of interest in investing in equity crowdfunding projects (86% of the respondents)

86%

14%Yes

No

The results are consistent with the respondents profile: Young, high-income and with superior literacy levels

If you believe in a SME's business plan, would be inclined to invest in it through this kind of investment?

CROWDFUNDING

INVESTMENT AMOUNTS

The results indicate a conservative profile regarding willing investment amounts 78% of the respondents would be willing to invest less than R$ 10,000 (about US$ 2,560)

How much would you willing to invest in a single project?

63%

15% 13%

4% 4%

0

10

20

30

40

50

60

70

80

Below R$ 5.000 Between R$ 5.001 and R$

10.000

Between R$ 10.001 and

50.000

Between R$ 50.001 and

100.000

Above R$ 100.000

CROWDFUNDING

SEGMENT

Technology is the favorite segment of potential investors

Besides these segments, education and sports/leisure were also spontaneously mentioned by respondents

What segment arouses your interest? 1= less interest 5= greater interest

2,81

3,46

3,60

4,49

0 1 2 3 4 5

Real Estate

Food

Health

Technology

CROWDFUNDING

EXPECTED RETURNS

97% of respondents intend to have returns in up to 5 years 56% expect a quick return (up to 2 years)

How long are you willing to wait until receive returns of this investment?

Possible incompatibility with proposed projects (maturity> 3 years)

27%29%

13%

27%

3%

0

5

10

15

20

25

30

35

< 1 year Between 1 and 2 years

Between 2 and 3 years

Between 3 and 5 years

More than 5 years

CROWDFUNDING

RISKS AND CONCERNS

Frauds and business failures are the most feared risks

In your point of view, what are the higher risks concerning equity crowdfunding?

1= lower risk 5= higher risk

Base: 114 respondents

CROWDFUNDING

CONCLUSIONS The survey raised relevant subsidies to the rule-making process Some of initial views:

Efficient disclosure rules and regular inspections might mitigate the main concerns presented by respondents (fraud risks, business failures, lack of information) Intended smaller investment amounts raise attention to regulation costs Expected quick returns, which, as a rule, are not consistent with the maturity of this kind of investment, shall be properly addressed in order to enable the success of these businesses (efficient disclosure and redemption rules)

CROWDFUNDING

Behavioural Sciences Unit - Interventions

Early childhood 6-18 years old Adults 50+ years old

Early Childhood project

Improving non-cognitive skills to promote long-term savings and healthy financial life

CVM website for children

Financial education apps

for teenagers

New Middle Class (Brazilian C Class) project Financial planning for

Rio State public servants

“Older Than 50” project Educational and

research activities aiming to protect elderly people from financial scams and abuse Partnerships

(CEPET- IVB, UFRJ, PUC e MP)

Short/medium-term impact Medium/Long-term impact

PLANNED PROJECTS FOR THE FUTURE

ONGOING AND FUTURE PROJECTS

Understanding Victims of Investment Fraud: a quantitative and qualitative study (in partnership with MP).

Financial Literacy and Personality Traits Survey:

3 questions FinLit Survey (Australia, Canada, Finland, France, Germany, Italy, Japan, New Zealand, Romania, Russia, Sweden, Switzerland, The Netherlands and United States)

The Big Five personality traits: openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism.

Outreach to Retail Investors Concerning Regulatory Initiatives

Disclosures (understanding).

Obrigado!

soi@cvm.gov.br

CVM’s website: www.cvm.gov.br

Investor’s Portal: www.investidor.gov.br

BE Blog: pensologoinvisto.cvm.gov.br

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