The Myth of the 'Empowered Consumer': Lessons from Financial Literacy Studies

'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, 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. Although such insights have influenced US consumer policy for many years, the EU legislature has only more recently started to actively take account of behavioural evidence in policy choices and lawmaking. This paper questions how EU law should respond to behavioural evidence in financial consumer law: should the empowerment model be abandoned in favour of a more paternalistic approach? Which alternatives exist? The argument put forward is that the empowerment model in EU consumer law 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 a re-balancing of private law and public law regulation in this field.