Misconduct in Banking and Finance: Implications of Behavioral Science Research for EU Law

The EU banking and financial sector is facing multiple challenges, driven by macroeconomic uncertainty, ongoing digitalization and increased competition from FinTechs and Big Techs. These pressures, coupled with structural profitability issues, increase the risk of misconduct as institutions strive to remain competitive. Recent data, such as the EU-wide stress test in 2023 and the ECB's sanctions report in 2024, highlight the pervasive nature of governance failures and conduct risk in the EU financial services sector.

Tackling these challenges requires a comprehensive understanding of the drivers of misconduct. The perspective taken to identify a problem is crucial, as it fundamentally influences how lawmakers approach and address specific issues. This research adopts an interdisciplinary methodology to explore the underlying causes of unethical behavior. More specifically, the study examines the phenomenon of misconduct from the standpoint of behavioral insights with a particular focus on the emerging field of behavioral ethics. This approach is multidisciplinary, drawing on a range of disciplines, including psychology, sociology, cognitive science, and neuroscience. The objective is to gain insight into the factors that influence people’s decisions, with particular emphasis on understanding what drives them to cross ethical boundaries. Behavioral sciences are underpinned by the use of experimentation and empirical analysis, providing a robust basis for understanding actual human behavior. This approach differs from the traditional legal approach, which is primarily based on theoretical assumptions about how people behave.

This study makes three significant contributions to existing literature.

Firstly, by adopting a behavioral perspective, the study provides a more in-depth understanding of the psychological and contextual factors that underpin misconduct, offering a more nuanced approach to addressing this phenomenon. This foundation paves the way for discussion on whether the current EU approach is appropriate or whether there is a need for adaptation to effectively address misconduct and promote ethical behavior in the financial services sector.

Secondly, this research maps the current applications of behavioral insights into EU banking and finance law, examining how these insights have informed specific provisions and shaped regulatory responses to identified issues. Furthermore, the research identifies areas that remain unaddressed or underutilized with particular attention given to the challenges posed by the digital transformation of financial services.

Thirdly, this research makes a contribution to existing literature by shifting the focus from the predominant emphasis on consumer decision-making to a broader examination of the psychological drivers of unethical behavior within financial organizations. While existing behaviorally informed policies are designed to empower consumers so that they are capable of making optimal choices, this study suggests that there is also a need to consider the psychological and contextual factors that lead individuals in the financial sector to act unethically.