Financial education and better regulation to go hand in hand

Lawmakers of the European Union underlined the importance of efforts aiming at increasing levels of financial literacy among EU citizens, depicting financial education as a ‘never-ending task’ that required the attention of public authorities, consumers and the industry alike.

“Financial education is in the interest of the EU consumers, the EU economy and the EU society as a whole”, Gianni Pittella, Vice-President of the European Parliament and member of the Committee on the Internal Market and Consumer Protection, said in a gathering of EU officials in the European Parliament on 27 January, sponsored by payment system provider Visa Europe. “It is crucial for consumers to understand the risks related to credit and other financial services”, he continued, “and the European Parliament is doing all it can to work with Member State authorities on common financial education principles”.

In doing so, the bloc’s legislative body can count on the support of the European Commission. Current initiatives such as the online consumer education tool Dolceta or the creation of an Expert Group on Financial Education will be complemented by the introduction of a module for primary and secondary school teachers as of March/April 2010, DG SANCO’s Deputy Head of Unit for financial services, Rossella Delfino, announced. The project finds its justification in the results of a survey that indicated financial education to be most effective when offered at an early age.

“Education falls under the responsibility of the Members States. The impact of EU institutions is limited”, Martin Merlin, Head of DG MARKT’s financial services policy unit, stated. “We can provide guidance, but Member States need to get active on the subject matter”.

Professor Umberto Filotto from the University of Tor Vergata in Rome cautioned against a one-sided debate. “Consumers are dramatically irrational. While financial education should not be neglected, it must not be considered a substitute for regulation”, the chair of the half-day event stated. The financial crisis has revealed the need to “join forces” in various aspects. Coordination between supranational, national and regional institutions is as critical as the cooperation between public authorities and the industry or complementing financial education schemes with better regulation.

“The regulatory framework is not as solid as it should be”, Merlin stated, referring to the market for retail investment products. The tightening of the legislative grip on the sector seems to be certain, as a proposal to be published in 2010 aims at making regulation “more clever”, he added.

In the meantime, a decision on the direction of travel of the responsible lending and borrowing debate still has to be taken as DG MARKT are awaiting the taking up of office of new financial services commissioner Michel Barnier. As of today, it is unclear whether the Commission’s closer look at the retail financial sector will result in a legislative proposal that could deal with issues such as product regulation or financial advice.

“We have to look closely at the issue of financial advice”, German MEP Kurt Lechner said. “But I am calling upon lawmakers to stop constantly changing the rules and coming up with new regulation”, he added. According to the rapporteur of the new Consumer Credit Directive, the implementation of which may play a decisive role in the decision-making of the European Commission as regards future rules on mortgage lending, a certain degree of EU-wide harmonisation can be beneficial, but has to be evaluated carefully. Differing languages, cultures and traditions may require country-specific assessments, regardless of whether dealing with pre-contractual information or early repayment issues on the one side or financial education schemes on the other, Lechner argued.

Remaining challenges, however, are the evaluation of the impact of financial education in the absence of suitable indicators as well as the provision of long-term funding both for the creation of educational schemes and research on the effectiveness of existing initiatives. “The finance sector does want skilled consumers. Large portions of the funding of financial education come from the industry”, John Rhodes from Citizen Advice in the UK said.

Globally, Visa has invested an estimated €7 million on financial education in an effort to reach 20 million consumers with the various initiatives launched by the card company. Convinced of the necessity to offer ‘learning-by-doing’ possibilities to young people, Visa is also working on the creation of so-called prepaid debit cards. Growing up in a society in transition from cash-based to alternative forms of payment, “young people need training with payment cards and learn how to keep track of their expenses”, says Visa’s Caroline Birchinall. The new form of payment – the acquisition of which requires parental consent – can be blocked for certain types of payments (e.g. gambling), offer parent access to track their children’s spending behavior and allow them to set daily or weekly spending limits.

Jean-Paul Gauzès from the Committee on Economic and Monetary Affairs of the European Parliament voiced his support for industry initiatives in the area of financial education. According to the MEP, however, ‘consumer protection by education’ is to be seen complementary to ‘consumer protection by law’. “Regulators, banks, consumers, schools, public authorities: we all need to make efforts”, Gauzes concluded.

Conference material (program, presentations) can be downloaded here.