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 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.

Financial Knowledge, Personality Traits, and Risky Borrowing Behaviors in Iranian Households

“…Ahmed and Ibrahim [57] organized the key features of a financial consumer protection regime as legislative empowerment and supervisory framework, information disclosure and protection, fair treatment of the financial consumer, complaints and redress, and financial literacy. However, Mak and Braspenning [58] cautioned that, while both information disclosure and financial literacy are key features of the framework, consumers, especially the most vulnerable groups, often lack the financial knowledge to use disclosures for self-protection. They urge balance with regulation that requires companies to warn and, in certain situations, even prevent high-risk consumers from entering certain risky transactions.…”

Financial literacy and numeracy

“…Recent consumer protection policies such as the MiFID II Directive (2014) in the euro area and the Dodd-Frank Act in the United States only partially consider this low level of household financial knowledge. Indeed, Mak & Braspenning, (2012) argue that the current regulation of the EU consumer credit market does not guarantee full consumer protection and they advocate that this regulation should give more protection to groups of consumers with low financial literacy and numeracy.…”

The State of Students’ Financial Literacy in Selected Slovak universities and its Relationship with Active Pension Savings

“…Social welfare and global future growth will depend in particular on knowledge-intensive industries, investing in knowledge has become an important way to foster economic growth linking to creating new jobs in Europe countries (Dumciuviene, 2015). According to other researchers (Mak & Braspenning, 2012;Rey-Ares et al, 2016) economic policy geared towards support of private retirement saving should take into consideration the social differences between population groups. For the most vulnerable groups with low income, low attained education and aged disadvantaged it would be advisable fostering educational programs to reduce financial illiteracy and amplify protection through regulation provided by financial institutions to prevent consumers from entering into overly risky agreements as well.…”