The Myth of the ‘Empowered Consumer’ - Lessons from Financial Literacy Studies

Abstract

‘Consumer empowerment’ is a central goal of European consumer law. The empowerment of consumers, e.g. through information disclosure or through education, is used as a means to tackle asymmetries of bargaining power between consumers and businesses. One area in which this policy is prominent is in financial services law relating to consumer credit and investment. In this field, empowerment relies on consumers’ ability to understand complex financial products, and their knowledge of and experience with financial products and services – in short, their ‘financial literacy.’ Financially literate consumers, therefore, are individuals who are equipped to assess risks and to make informed decisions about the suitability of financial products to their situation.

However, the focus on empowerment is under pressure. Insights from behavioural studies reveal that consumers’ ability to make rational, informed choices is limited. This paper questions how EU law should respond to such insights: should the empowerment model be abandoned in favour of a more paternalistic approach? Which alternatives exist? The argument put forward in this paper is that a radical departure from current practice may not be desirable in the light of economic goals. However, the model needs updating: lessons from financial literacy studies suggest that adjustments can be made to improve the law by allowing greater differentiation between individual consumers, and in certain circumstances by introducing stricter regulation. That can involve, also, a re-balancing of private law and public law regulation in this field.

Keywords: European consumer protection law, credit market, empowerment, paternalism, financial literacy, law and economics, private law