The Future of Consumer Credit Regulation

Creative Approaches to Emerging Problems

Michelle Kelly-Louw, Peter Rott, James P. Nehf

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781351889216
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Derecho mercantil

Effective regulation of consumer credit in modern society is an ever-changing challenge. As new forms of credit emerge in free societies, regulation often lags behind. This volume explores contemporary problems related to the regulation of consumer credit in market economies with a focus on credit extended to the most vulnerable and poorest members of the community. Written by experts in the field of consumer credit regulation from Europe, North America, Australia and South Africa, the book examines some of the most important consumer credit issues facing consumers today and proposes innovative ways to protect the consumer interest in those markets.

PART I

Emerging Paradigms

Chapter 1

Financial Literacy and the Creation of Financial Citizens

Gail Pearson¹

1. Introduction

There is an international movement to foster financial literacy which aims at creating new financial citizens. This involves a reformulation of what is required to be an effective citizen. The financial citizen should have the skills to survive in a sophisticated financial world and to participate within a new polity informed by their market participation. For individuals, financial literacy is essential to ensure they are not excluded from economic participation and ultimately for effective political participation. The financial literacy project is pursued through concepts of choice and responsibility,² the regulatory approach of mandated information disclosure³ and with education.⁴ At one level, financial literacy is concerned with simple budgeting, avoiding excessive debt and managing credit. At another, it involves education in the ways of the financial market and market risk. It is a strategy to mobilize further resources for an efficient market and ultimately it links market and political participation.

Financial literacy provides an example of the globalization of forms of regulation that result from conversations between regulators.⁵ On one analysis this is a response to market failure as exemplified by the pension misselling scandals of the UK and firmly part of regulatory intervention in the market. On another it can be viewed as a means of constituting a market with a greater array of informed individual participants. A further analysis may portray it as associated with the shift of risk for individuals’ financial well being from the state to the individuals themselves.⁶

Education for financial literacy is a way of reshaping the knowledge and outlook of whole populations in the liberal democracies. As a form of regulation it is concerned with intentionally changing behaviour. This is usually thought of as changing the behaviour of business and through industry self regulation the internalization of the desired values and approaches. Since the market is shaped by and shapes human behaviour, the concerted effort within the liberal democracies to educate citizens in the ways of the market should change behaviour, the market and the nature of the relationship between the financially literate citizen and the state. The democratization of financial services markets and consumer expectations of those markets should influence rights and obligations within those markets and the wider polity.

2. Who is the Financial Citizen?

Marshall’s starting point for contemporary discussion of citizenship distinguishes between three forms of citizenship, civil, political and social.⁷ Marshall associated civil citizenship with the eighteenth century and rights for individual freedom such as speech, faith, property, contract and justice, and the development of institutions such as the courts associated with those freedoms. Political citizenship was linked by Marshall to the nineteenth century, Parliament and the franchise, and rights to participate as a member of a political institution or as an elector. The social citizenship of the twentieth century linked to the welfare state involved rights to economic welfare and security, access to social heritage through education, and social services.

As new forms of economic organization emerge other commentators have grappled with new meanings of citizenship. Condon and Philipps provide an account of some of these citizenships: neoliberal, market, economic, industrial, enterprise, corporate, business, and citizenship at work, themselves preferring “economic citizenship discourse”.⁸ The challenge, they say, is to “redefine the citizen as a creature of markets” and examine the role law plays in constituting this citizen, not just to reconceptualize the state.⁹ Gray and Hamilton refer to the financial citizen and say that the concept refers to active, informed, responsible market participants.¹⁰ This market participant, educated to embrace market risk, contrasts with the risk minimizing, thrifty, prudent citizen of earlier times.¹¹

3. Making the Financial Citizen

Just as regulation aims at encouraging the new socially responsive open firm, regulation through financial literacy aims at creating a citizen responsible in new ways. This is more than a regulatory technique that complements disclosure of information to consumers for better choices and an efficient market. It is also part of the making of the new financial citizen who is knowledgeable about market risk, a willing participant in the market for financial services, and dependent on the financial services market for long term economic security. Education for citizens about finance runs parallel with policy decisions that shift financial market risk, in particular for retirement incomes, from the state or employer to individual consumers.

There are similarities between the objectives of consumer law and those of democratic participation. Making a choice is central to both. Consumer law aims to enhance the participation of individuals in the market economy for optimum efficiency and performance of the market. Democratic forms of government are based on the notion that if all adults share in selecting those who govern they will choose the group of individuals to formulate policy best suited to the times. This aspect of choice is central to both consumer and political participation. In the consumer context and in the electoral environment the law is concerned with free choice. That is the individual should be able to choose goods, services (and politicians) that suit that individual and choose free of outside interference. Indeed a large part of contract law is devoted to this objective.

What is required to sustain this freedom of choice and optimum decision-making for both the individual consumer and citizen rests among other factors: information about products, people, issues, and context. A consumer and a citizen need to interpret information in order to utilize it. This addresses the role that education plays in equipping individuals to be both effective consumers and citizens. Education has a further function. It is not just about providing information so that individuals can make choices. It is also about creating virtue and thus virtuous choices.

It is in this sense that the financial literacy project intersects with the market and society. The old role of education in the creation of the virtuous citizen is now harnessed in creating the virtuous market participant so that there is a coalescence of the two, the virtuous market participant becoming the virtuous citizen.

This overlaps with another attribute of the contemporary virtuous citizen, the responsible citizen. Responsible government is concerned with legal responsibility, accountability and moral culpability.¹² It is a ‘means by which Parliament brings the Executive to account’.¹³ The question of to whom the government and ministers might ultimately be responsible leads to the concept of representative government. Responsibility and representation as principles of government involve participation. In liberal democratic societies the cornerstone of this participation is the right to choose, to vote in the selection of government. It is sometimes forgotten that adult franchise did not exist before the twentieth century.

The conversation on responsibility or ‘responsibilization’ has been carried on as reworking the relationship of the individual to the state – the state withdrawing from the provision of services, requiring individuals to make decisions, increasing risk because decisions have to be made, and invoking responsibility and accountability. Giddens argued that there was a crisis of responsibility corresponding to the negative and positive sides of risk, that is, risk as limiting consequences and risk as an energizing principle. He asked that we recognise the interconnection between risk, responsibility and initiative.¹⁴ Others have stressed that the rebalancing of personal and collective responsibility has led to an emphasis on personal financial autonomy,¹⁵ that individuals have become accountable to the state for their personal financial decision-making,¹⁶ that the responsible financially literate consumer will civilize the market through enhanced market choices,¹⁷ and finally that the responsibilising process which mobilizes risk and uncertainty and leaves the individual free to choose and democratizes new areas of human life.¹⁸ Civilizing the market and democratizing and politicizing individual financial choices are at the core of creating the new financial citizen.

The assignment of financial responsibility to individual citizens within liberal democracies is now well known. This has involved liberalizing financial markets, changes to government balance sheets, the retreat of the welfare state, diminution in the quantum of benefits associated with the rights linked to ‘social citizenship’,¹⁹ the encouragement given to individuals to use programs and resources provided by industry rather than government. In Australia there has been an expansion of consumer credit, concern with the extent of consumer over-indebtedness,²⁰ compulsory tax protected superannuation savings or investment for retirement, the introduction of ‘choice of fund’ for employees rather than the nominated employer superannuation fund, the proliferation of ‘self managed’ or ‘do it yourself’ superannuation funds, and a litany of financial scandals and collapses. The most notable collapse was Westpoint where investors (many using their lump sum superannuation payments on retirement) were sold into mezzanine finance at above market returns by financial planners receiving above market commissions.²¹ For some, the new responsibilities have resulted in significant increases in wealth due to a buoyant stock market and liberal credit markets. Others have benefited from liberal credit markets to take on more household debt and despite statements about irresponsible lending, this is not widespread.²²

4. The Financial Literacy Project in Australia

The responsibility for financial services in Australia is apportioned between different regulators. For the main part consumer credit is the responsibility of State governments and their Offices of Fair Trading which administer the Uniform Consumer Credit Code.²³ The Commonwealth of Australia and the Australian Securities and Investments Commission nevertheless have some responsibilities for credit, particularly for conduct in selling and providing credit, via the consumer protection provisions in the Australian Securities and Investments Commission Act 2001 (Cth).²⁴ It is now decided that credit should become entirely a Commonwealth responsibility.²⁵ In the meantime the states continue to promote state based reform of consumer credit regulation, notably draft state based legislation to regulate finance brokers nationally.²⁶ Other financial services such as investments, insurance and superannuation are regulated by the Commonwealth.²⁷ Australia is unique in that although sending unsolicited credit or debit cards is prohibited,²⁸ retail clients ...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Contents
• List of Contributors
• Preface
• Introduction
• Part I Emerging Paradigms
• Part II Responsible Lending
• Part III Debt Relief and Insolvency
• Index