The Illusion of Consumer Protection in Financial Services: A Behavioral Perspective

Taking out a mortgage, entering into a credit agreement or purchasing an insurance policy are financial decisions that can have long-term and often irreversible consequences. Unlike routine purchases, these choices are complex, infrequent and risky, making them challenging for most consumers. The EU has sought to address these challenges by strengthening consumer rights, imposing information duties on financial providers, and creating redress mechanisms. Yet, these efforts are not always effective as they tend to rely on traditional economic assumptions that portray an overly simplified image of the financial consumer. In reality, decision-making is shaped by a range of psychological and cognitive factors that create a far more complex picture. Drawing on insights from behavioral sciences, this paper explores some of the key drivers of consumer behavior in financial markets. The objective is to seek how the EU can reduce the discrepancy between its current approach to consumer protection, which is based on various misconceptions, and the actual complexities of human decision-making. By giving due consideration to the psychological and contextual factors that shape consumer behavior, the EU will be better placed to design protective measures of greater effectiveness and to become more attuned to societal realities.