Social welfare issues of financial literacy and their implications for regulation

Abstract

Financial literacy has become a prominent item on the public agenda worldwide, with its relevance very much underlined by the high-profile role played by consumer finance in global credit crises from 2007 onwards. Assumptions about the level of consumers’ financial literacy frequently influence the formulation of regulatory policy, whether tacitly or explicitly and many national governments are actively engaged in financial education programs of various sorts. Indeed since at least 2003 the OECD has actively developed and encouraged such efforts. An underlying supposition of these initiatives is that more financial literacy is socially preferable to less. We examine that supposition in a formal analytic framework and demonstrate plausible conditions under which it is not true. We discuss implications of this for policy-makers and regulators alike.