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Consumer Protection in the EU: Searching for the Real Consumer

Jacqueline Minor

European Business Organization Law Review / Volume 13 / Issue 02 / June 2012, pp 163 - 168
DOI: 10.1017/S1566752912000122, Published online: 28 June 2012

Link to this article: http://journals.cambridge.org/abstract_S1566752912000122

How to cite this article:

Jacqueline Minor (2012). Consumer Protection in the EU: Searching for the Real Consumer. European Business
Organization Law Review, 13, pp 163-168 doi:10.1017/S1566752912000122

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European Business Organization Law Review 13: 163-168 163
2012 T.M.C.ASSER PRESS doi:10.1017/S1566752912000122

Consumer Protection in the EU:

Searching for the Real Consumer

Jacqueline Minor .

Alan Greenspan, the former Governor of the Federal Reserve, remarked in the
context of the financial crisis that even sophisticated investors got things badly
wrong.1 This comment throws a spotlight on quite how out of step and unrealistic
general assumptions can be as regards markets and market regulation. From a
consumer perspective, we may wonder what chance the average consumer has of
getting things right, if sophisticated investors can get things so badly wrong?
Much of the legislation governing financial products and financial services is
based on the classical view that economic agents, including consumers, are essen-
tially selfish by nature, seeking to maximise their personal financial benefit, by
acting in a rational manner and through making independent choices.
Of course, nobody pretends that this view is an accurate reflection of the
economy, and even less so an accurate portrayal of human beings. Yet this forms the
standard profile for modelling and thus the basis for assumptions which underpin
much of the regulation governing the economy.
For those assumptions to be useful in modelling as a background for legislation,
they need to capture fundamental truths about an economic system. However, the
available evidence especially that gathered and observed over the past four or five
years is that this is clearly not the case and that economic models in general still fail
to capture the fundamental truths about the way real people behave in a real economy.
One of the things we have tried to do within the European Commissions
Directorate-General for Health and Consumers (DG SANCO) is to show how
behavioural insights can assist in the design of policy interventions. We found that
the best way to present a persuasive argument was to carry out research to
demonstrate the usefulness and potential of behavioural insights.
In 2010, we undertook an extensive study of consumer decision-making in retail
investment services.2 This study showed that consumers are very far from being
rational and independent when making investment choices.

Director of Consumer Affairs, DG Health and Consumers.

1 In R. Thaler and C. Sunstein, Human Frailty Caused This Crisis, Financial Times, 11

November 2008.
2 European Commission, Consumer Decision-Making in Retail Investment Services: A

Behavioural Economics Perspective (2010), available at: <http://ec.europa.eu/consumers/strategy/

consumer_behaviour_en.htm>.
164 Jacqueline Minor EBOR 13 (2012)

The evidence we gathered showed that consumer decisions can be influenced by a

wide variety of factors, some of which may even seem trivial. Decisions can depend
on context, on whether consumers are feeling nervous or pressured, or on whether or
not they feel confident on that particular day. Their decisions are subject to framing
effects, how the choice is presented to them, and by whom it is presented. And most
of us can be swayed by biases such as overconfidence. We might have an over-
inflated belief in our own power of judgment, numeracy or literacy. Or we might
simply not wish to appear less than competent, or even stupid.
Consumer preferences can be distorted by behavioural biases such as a myopic
tendency to focus too much on the short term and not enough on the medium or long
term. Plus we tend to rely on heuristics on rules of thumb with which we are
comfortable, but which may not accurately reflect the marketplace or the economy.
In our studies conducted with a broad cross-section of consumers we asked
people to allocate money between two investment choices. Participants were
presented with five different and simplified choices (see Figure 1). For each choice
between two alternative products, there was always one product objectively more
advantageous than the other.

Figure 1: Example screen shot (UK version)

You have 10,000 to invest and must choose how
to allocate it between the following products:

5-year Investment A 5-year Investment B

Fixed gross return of 5% per year
An initial set-up fee of 240 applies
Annual management fee of 70 (to
be paid at the end of each year)
Fixed gross return of 5% per year
No initial set-up fee
Annual management fee of 0.8%
(payable on the entire amount held
at the end of each year)

How much would you like to invest in each product? Please enter a number between
0 and 10,000 in the boxes below, so that the total investment sums to 10,000
Investment A: Investment B:

You currently have 10,000 left to invest. Divide all the money between the investments before proceeding.

Continue

The results were that just over a half of the funds were invested optimally (see Figure
2). Even where the logical thing to do when confronted with two alternatives was to
put 100% of their funds in the better of the two alternatives, most people showed a
degree of caution and hedged their bets by putting some of the money in the less
Consumer Protection in the EU 165

attractive product. Of the five investment choices presented, less than 2% of

participants made the right choice every time.

Figure 2: Distribution of share of funds invested optimally (all tasks)

0.30

0.25

0.20
Density

0.15

0.10

0.05

0.00
0 0.2 0.4 0.6 0.8 1

Share of funds invested optimally

Our work shows that the investment market makes consumer decisions particularly
prone to biases and errors. But there are particular features of the investment market
that further explain why this should be the case.
Investments products and also credit products to some extent are often both
inherently risky and last for a long duration. However, people struggle to take a long-
term perspective and are not in the habit of having to make decisions based on
predictions about where they will be or what their personal circumstances will be in
five, ten or twenty years time.
The investment market is also characterised by a very wide range of products,
which are priced in an often opaque and complex manner. It is not like buying apples
and oranges at the supermarket. Nor is it like buying a new car.
Consumers typically do very little of their own research. There is evidence to
show that people devote a lot more time to deciding what car they might want to buy
than what mortgage or investment product they should choose.
Typically, consumers rely upon the advice of a professional adviser or of a
salesperson. This makes trust and persuasion key issues in this market. We are
probably still scratching the surface of the biases which exert an influence on
166 Jacqueline Minor EBOR 13 (2012)

peoples preferences and decisions. For example, a group of researchers from

Nijmegen University recently showed that the cognitive responses of men diminish
by several points if questions are put to them by a woman rather than a man.3
Advice is another big issue in relation to the investment market. While the
European Market in Financial Instruments Directive (MiFID) already prescribes that
investment providers must make sure that advice is as objective and well suited to
the client as possible, this is not always the case.
And continuing with advice, there is another piece of evidence that the European
Commission can put on the table. In a recent study, mystery shoppers, posing as
real consumers, were sent to seek advice on an investment decision.4 They found
perhaps not surprisingly but nevertheless still worryingly that in many cases the
advice provided was more in the providers than in the consumers interest.
One question that arises is whether the key issue in such cases concerns the
current legislation or whether it is a matter of enforcement. However, in our mystery
shopping exercise it would have been difficult to point to a legal requirement which
had been breached because the formal rules were met but nevertheless the outcome
was less than optimal for the consumer.
What does this all tell us about the way forward? Our European Consumer Policy
is broadly based on the concept of empowering consumers and of encouraging
consumers to be active players in the marketplace, enabling them to defend their own
interests and assert their rights.
Policy measures are devised for and aimed at the average consumer. But
another piece of research we carried out shows that regulators, legislators and policy-
makers have placed far too high an expectation on the average consumer. We carried
out an Empowerment Survey covering 50,000 Europeans, testing all manner of
things, such as knowledge of consumer rights, recognition of logos, as well as basic
numeracy and literacy skills.5 Once again, the results were surprising alarming
even.
The lesson would seem to be that if you are pitching legislation at an average
consumer, who is defined as reasonably well informed, and reasonably observant
and circumspect, you need to be clear about the boundaries of that definition and
how it translates to the behaviour of real people going into shops and banks or
choosing a service provider.6

3 J. Karremans, et al., Interacting with Women Can Impair Mens Cognitive Functioning, 45

Journal of Experimental Social Psychology (2009) pp. 1041-1044.

4 European Commission, Consumer Market Study on Advice within the Area of Retail

Investment Services (2011), available at: <http://ec.europa.eu/consumers/rights/docs/investment_

advice_study_en.pdf>.
5 European Commission, Consumer Empowerment in the EU, SEC (2011) 469 final (2011),

available at: <http://ec.europa.eu/consumers/consumer_empowerment/docs/swd_consumer_em

powerment_eu_en.pdf>.
6 Recital 18 of European Parliament and Council Directive 2005/29/EC of 11 May 2005.
Consumer Protection in the EU 167

As we emerge from the financial crisis, we must be careful not to overreact. We

need to take a balanced approach so that consumers can take advantage of the
opportunities of the single market while providers can continue to innovate and
compete.
We might need to consider putting in place specific legislation for the most
vulnerable of consumers. This would amount to social legislation rather than
market regulation, by offering vulnerable consumers specific products through
means other than the traditional market.
There are some horizontal themes transparency, management of conflicts of
interests, standard simple product information, enforcement and redress that
certainly need to be carefully considered. But such themes need to be addressed in
different ways for different products. What you need when you are making an
investment decision might be different from what you need when you are taking out
a consumer loan.
Banking services is one market that the European Commission is currently
looking at very closely. Clearly, it is very important for consumers to have efficient,
transparent banking services. Our work to date has shown that banking fees, for
items like current accounts, are anything but transparent. We discussed our findings
with the banking industry to try and agree a self-regulated code, but regretfully that
approach did not ultimately bear fruit.
Furthermore, the evidence of another self-regulated code, this time on switching
bank accounts, making competition work for consumers, is similarly far from
encouraging. Consequently, we are now looking to the preparation of a legislative
proposal in the area of transparency both for bank fees and for bank account switching.
Within the European consumer acquis, we have the Consumer Credit Directive
plus another proposal on mortgage credit currently before the European Council and
the European Parliament. Both initiatives rely upon the techniques of standardised
information, but the mortgage credit proposal also contains an attempt to introduce
the concepts of responsible lending and responsible borrowing. The same idea was
used for the Consumer Credit Directive, although this approach was eventually
abandoned. However, times have perhaps changed and we remain hopeful that we
might be more successful this time around.
We are also looking at enforcement. One of the problems with financial services
is also that we have market supervisory authorities which tend to look at systemic
problems, and consumer authorities which often feel that financial services is an area
for the specialist financial regulators.
However, we recently carried out a so-called sweep, where consumer
enforcement authorities and financial services authorities together reviewed the
consumer credit websites of over 500 financial providers. At first glance, 70% appear
to be in breach of the rules, failing to display, for example, the annual percentage rate
of charge directly. There is clearly more to be done here as regards enforcement.
We also need to ensure that consumers have simple and adequate means of
redress at their disposal. We currently have proposals before the European Council
168 Jacqueline Minor EBOR 13 (2012)

and the European Parliament on alternative dispute resolution and online dispute
resolution, while we are considering the best approach to take in relation to collective
redress.
A key activity of the European Commissions Directorate-General for Health and
Consumers keeps markets, and in particular problematic markets, under close
review. We put together and publish the Consumer Markets Scoreboard on an annual
basis. The Scoreboard and screening activities look at all consumer markets, 51 in
total. Investment, banking and financial services consistently scores very badly,
showing that these markets do not function as they should.
We are about to embark on an in-depth study of the credit market, to see what
impact the Consumer Credit Directive has had. And of course, we will carry on
looking at how markets function for consumers, and at how consumers behave in
order to progressively define and introduce better policies and better solutions
matched to true consumer needs.