Financial literacy ‘not a substitute’ for regulation

Speaking at the Australian Securities and Investments Commission’s (ASIC) annual forum, the chair of the European Securities and Markets Authority Steven Maijoor welcomed the ASIC’s new product intervention powers enshrined under the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019.

Under the bill, product providers are obligated to specify the target market for each of their products, ensuring that the design of the products are consistent with the likely objectives, financial situation and needs of customers within that target market.

The obligations will be phased in over two years, requiring product issuers to identify in advance the consumers for whom the products are appropriate and distribute to that target market.

However, concerns have been raised over the potential impact that the use of such powers may inhibit innovation and competition in the financial services industry.

Mr Maijoor dismissed suggestions that a push to enhance financial literacy could serve as an alternative to regulation by empowering consumers to make informed decisions to avoid risks associated with unsuitable financial products.

“I would see education as complimentary but not as a substitute,” he said.

“Obviously, it would be beneficial for financial market functioning if there was better knowledge among households and consumers around financial products, but I think that would not be sufficient or resistant to the situation.”

Mr Maijoor said that, based on his experiences, consumers do not replicate learned behaviour from other markets when purchasing a product or service in the financial sector.

“I’ve probably shifted, where I started off by saying that we should solve most of these issues with more transparency and that should do the trick, but seeing the number of cases where that doesn’t work moves you automatically to a situation where there needs to be better protection,” he said.

“Normally, consumers can learn in markets where they have repetitive behaviours and they can improve. For example, if you buy some faulty electronics and it doesn’t function, the second time round you can do it in the right way.”

The chair of the European regulator added that much of the innovation in the financial services industry is “supply-driven”, claiming that not enough consideration is given to whether the product is “benefiting the end retail consumer”.

He concluded: “We need to continue to emphasise the responsibility of consumers because ultimately, as an individual, you’re your best supervisor if you’re as critical as a consumer.

“But I think, ultimately, it is a market where some high level of protection is needed.”

[Related: ASCI powers to protect borrowers from ‘poverty trap’]