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Errare humanum est: Financial Literacy in European Consumer Credit Law

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  • Vanessa Mak
  • Jurgen Braspenning
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. Copyright The Author(s) 2012

Suggested Citation

  • Vanessa Mak & Jurgen Braspenning, 2012. "Errare humanum est: Financial Literacy in European Consumer Credit Law," Journal of Consumer Policy, Springer, vol. 35(3), pages 307-332, September.
    • Handle: RePEc:kap:jcopol:v:35:y:2012:i:3:p:307-332
    DOI: 10.1007/s10603-012-9198-5
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    2. Brenda J. Cude & Swarn Chatterjee & Jamal Tavosi, 2020. "Financial Knowledge, Personality Traits, and Risky Borrowing Behaviors in Iranian Households," Sustainability, MDPI, vol. 12(18), pages 1-16, September.
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    4. Lunn, Pete & McGowan, Féidhlim & Howard, Noel, 2018. "Do some financial product features negatively affect consumer decisions? a review of evidence," Research Series, Economic and Social Research Institute (ESRI), number RS78.
    5. Olha O. Cherednychenko & Jesse M. Meindertsma, 2019. "Irresponsible Lending in the Post-Crisis Era: Is the EU Consumer Credit Directive Fit for Its Purpose?," Journal of Consumer Policy, Springer, vol. 42(4), pages 483-519, December.
    6. Robert Toth & Richard Kasa & Csaba Lentner, 2022. "The Impact of Financial Culture on the Operation of Hungarian SMEs before and during COVID-19," Risks, MDPI, vol. 10(7), pages 1-18, June.

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