Errare Humanum Est. Financial Literacy in European Consumer Credit Law

Abstract

Examples of financial mistakes made by consumers lend support to the view that systematic mistakes of consumers exist in the EU credit market and that service providers respond strategically to these by redesigning their products. This paper seeks to determine how existing regulation can be improved to ensure consumer protection.Using insights from behavioral economics, this paper argues that financial literacy – that is, knowledge and understanding of complex financial products – as a cornerstone for European financial consumer law is problematic. Current regulation is based primarily on information provision to consumers, which should enable them to make appropriate decisions about the risks and suitability of financial products. Although behavioral economics does not necessarily require legal intervention to take other forms than the introduction of information duties, the type of intervention is dependent on the design and needs of a particular market. The EU consumer credit market, in our view, demands more than current regulation offers in terms of consumer protection. In particular, behavioral studies reveal that consumers generally do not have a sufficient level of financial literacy in order to enable them to make informed, rational decisions. Moreover, behavioral biases have a distorting influence on consumer decision-making. The law as it stands, therefore, seems ill-equipped to offer protection to consumers and to prevent them from rash and bad decision-making. Reviewing existing regulation and case law, we propose that in EU law the Consumer Credit Directive and the Markets in Financial Instruments Directive (MiFID) require updating in order to offer sufficient protection to vulnerable groups of consumers who on average have low levels of financial literacy.