Articlehybrid2012

Errare humanum est: Financial Literacy in European Consumer Credit Law

29 citations0/0 files storedJournal of Consumer Policy

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European and International Contract Law Financial Literacy, Pension, Retirement Analysis Financial Literacy and Behavior

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.

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References

1974Judgment under Uncertainty: Heuristics and Biases 1975Judgment under Uncertainty: Heuristics and Biases 1981The Framing of Decisions and the Psychology of Choice 2007Financial Literacy and Stock Market Participation 2000When choice is demotivating: Can one desire too much of a good thing?2000When choice is demotivating: Can one desire too much of a good thing?2017The University of Chicago Law Review 2007Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education

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