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 behavioural economics, this paper argues that financial literacy—that is, knowledge and understanding of complex financial products and skills to navigate the financial market—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 behavioural 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 the current regulation offers in terms of consumer protection. In particular, behavioural 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, behavioural 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 the EU law, the Consumer Credit Directive and the Markets in Financial Instruments Directive require updating in order to offer sufficient protection to vulnerable groups of consumers who, on average, have low levels of financial literacy.
Highlights
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
The big advantage here is that the Financial Ombudsman Service (FOS) is not obliged to decide on the basis of common law: They can go beyond the law and decide cases on the basis of what is fair and reasonable, including good practice, voluntary industry standards and codes, and the Financial Services Authority (FSA) Handbook (Howells 2010, p. 634). This often leads to more consumer-friendly decisions than the common law routes of misrepresentation, breach of duty, or breach of fiduciary duty. This brief overview of domestic cases confirms that financial mistakes by consumers are common and, that finding an appropriate legal solution is not straightforward
Theoretical support for that conclusion can be gleaned from behavioural economics studies which have cast doubts on the effectiveness of information duties as means of consumer protection (Bar-Gill 2008a; Ben-Shahar and Schneider 2010)
Summary
This brief overview of domestic cases confirms that financial mistakes by consumers are common and, that finding an appropriate legal solution is not straightforward. Information on the attributes of a product and information on individual uses of the product) or whether they should be supplemented with other modes of regulation, such as stricter duties to warn or perhaps even duties to withhold credit from consumers if products are not suitable for them in light of their financial position or their inexperience with the credit or investment market. This question—which basically asks how much responsibility for bad decision making should lie with consumers themselves—requires that we have insight in the abilities of consumers to safely navigate the financial market. We will focus our enquiry, on the financial literacy of consumers
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