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* FCA tells banks can't rely on "buyer beware" defence
* Regulator taps behavioural economics for first time in UK
* Lawyer says speech marks key shift in regulation inBritain
By Huw Jones
LONDON, April 10 (Reuters) - Britain's new watchdogannounced sweeping changes in financial regulation on Wednesday,telling banks they can no longer blame customers when productsgo wrong and promising to study how consumers behave to makesure they can make the right decisions.
The Financial Conduct Authority is one of two new agencieslaunched this month to replace the Financial Services Authorityand rewrite the rules for a financial industry brought low bythe 2008 crisis and years of costly misbehaviour.
The FCA's main focus is on protecting consumers who havebeen ripped off in recent years by the selling of inappropriateproducts in a series of scandals that led to settlements costingbanks billions of pounds.
Banks will no longer be permitted to claim the "caveatemptor" or "buyer beware" defence when selling complex productsto customers with little knowledge of finance, the FCA'smanaging director Martin Wheatley will say in a speech later onWednesday.
It signals a shift from the principle that has longunderpinned UK financial regulation, under which the risk of aninvestment decision usually falls on the buyer.
"There are questions that many investors simply will not askbecause they are humans, not automatons," Wheatley will say inhis first speech as CEO, excerpts of which were made availablein advance. "There is a question of how a regulator navigatesthe balance of power between consumer and provider."
Wheatley will announce plans to draw on the emerging fieldof behavioural economics for the first time by a Britishregulator, to encourage better consumer decisions and stop sharppractice at banks, according to the excerpts.
Unlike traditional economics, which assumes people will tendto behave rationally, behavioural economics looks at how socialand emotional factors lead people to make decisions. It usesinsights from psychology to explore the reasons for mistakes,like failing to cut losses when an investment goes wrong or notunderstanding what compound interest is.
"We want the regulatory system to use behavioural economicsto ascertain whether people are being put off switching productsthrough inertia, inattention or even the simple fear of regretfrom making the wrong decision," Wheatley will say.
The FCA is part of Britain's new supervisory system,launched to draw a line under both the financial crisis and twodecades of scandals over the mis-selling of products, frompensions to payment protection insurance.
A separate body will supervise whether banks are sound,splitting the duties of the former FSA which used to beresponsible both for overseeing banks' financial positions andfor monitoring misbehaviour in the financial sector.
The banks' 14 billion pound compensation bill formis-selling loan insurance is high enough for regulators toforce them to hold more capital to keep the financial systemstable.
Etay Katz, a financial services lawyer at Allen & Overy,said the speech marks a shift in responsibility for banksdelivering a product to mass markets.
"The broader concern is that this will not only be appliedjust to retail but also to wholesale as well so you can't assumea big investor like local authorities have the expertise thatcan be relied on," Katz said.
UK lawmakers are pushing the FCA to get banks to offer asuite of easily understood, simple savings products to encouragemore people to save for their retirement and rely less onpensions from cash-strapped governments.
The watchdog published two papers on behavioural economics,looking at how consumers choose and use products, andencouraging customers to claim redress.
