With inflation, unregulated financial products will harm the vulnerable even more. Unless… | Finance Watch

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With inflation, unregulated financial products will harm the vulnerable even more. Unless…

The “cost of living crisis” may push European vulnerable consumers towards “easy consumer credit” and unregulated, dangerous new financial products: Europe’s regulation for financial services – currently under review – could protect them.

EU consumers are increasingly feeling the impact of the inflationary pressures stemming from rising energy and food prices on their everyday lives as they are witnessing a sharp decline in their disposable income and with it their living standards.

This development, also known as the cost of living crisis, already started before the Russian invasion of Ukraine but has now massively accelerated. Recent statistics from Eurostat show that annual inflation is expected to be 7.5% in March 2022, up from 5.9% in February. Among the largest EU member states, inflation in Germany was up 7.6 percent, in France 5.1 percent, in Italy 7.0 percent and in Spain 9.8 percent.

Record consumer borrowing, increased recourse to crypto assets

With households’ disposable income decreasing, consumers are likely to increasingly look in the financial services market for products allowing them to maintain their standard of living and pay off bills they are no longer able to afford. One of the products likely sought is consumer credit. Statistics show, for example, that consumers in the UK borrowed a net £1.5bn on credit cards in February, the highest monthly amount since records began in 1993. Total consumer credit in the UK now stands at £1.9bn net which is the highest level in five years.

A fall in household disposable income and purchasing power could also make innovative and sometimes unregulated retail investment products more enticing for consumers looking for quick and high returns to boost their income levels. In recent times, for example, consumers have turned to crypto assets. These products are largely unregulated and have been aggressively advertised on social media, including with the use of social media ‘influencers’, promising consumers fast and high returns.

EU retail financial services regulation: our key recommendations

This development makes the need for robust consumer protection measures in retail financial services regulation more important than ever. Regulation is vital to ensure that consumers are protected from taking out a financial service which does not help alleviate their financial difficulties and meet their needs but makes their financial situation even worse. There are a number of EU retail financial services files either currently under review or in the pipeline of being reviewed in 2022. It is key that these reviews ensure that consumers, and in particular the vulnerable, are adequately protected.

The Consumer Credit Directive (CCD)

The Consumer Credit Directive (CCD), the EU directive regulating the EU consumer credit market, is currently undergoing a review. With the increase of consumers seeking debt to finance their livelihoods, it is absolutely essential that the directive protects vulnerable consumers.

Lower income consumers are the ones the most impacted by the current cost of living crisis. As highlighted in a recent Finance Watch study on the EU consumer credit market, this consumer group is most likely to purchase new and unregulated credit products which are of small value. These products, however, are the riskiest as they are associated with high costs and fees, especially in relation to the low incomes of vulnerable consumers. To avoid these consumers falling into a situation where their economic burden gets even worse, instead of better, it is absolutely essential that these new credit products are brought into scope of the CCD.

Likewise, it is essential that the key provisions of the directive are fully applied to these new credit products. For example, the most effective tool to avoid mis-selling of loans are creditworthiness assessments. These assessments check if someone is able to afford a loan in the first place. These checks can only be effective, however, if creditors make a proper evaluation of the consumer’s household budget which includes income, essential expenditures as well as outstanding debts of the household. Not making a thorough assessment bears the risk that a consumer is sold a loan which he or she is unable to afford, leading to a worsening financial situation for the consumer or even over-indebtedness. Therefore, it is key that the full creditworthiness assessment rules of the CCD are applied to these new loans and that the rules are sufficiently robust.

The Distance Marketing of Consumer Financial Services Directive (DMFSD)

Another key retail financial services directive under review this year is the Distance Marketing of Consumer Financial Services Directive (DMFSD). The DMFSD provides two key functions. For one, it regulates all types of retail financial products and  acts as a safety net providing consumer protection for new products coming onto the market that are not (yet) covered by product-specific legislation. Secondly, it fills regulatory gaps that exist in current product-specific legislation.

Therefore, this directive has the potential to protect vulnerable consumers seeking high returns during crises as the current one from financial services that are not covered by product-specific regulation. Consumers have lost a lot of money from purchasing unregulated products such as crypto assets in recent times because these assets are not covered by product-specific regulation and the DMFSD currently lacks key consumer protection measures such as advertising rules. There is a high degree of aggressive and misleading advertising in connection with these assets. These advertisements focus on the advantages of the products but either do not provide any information at all about the product’s risks or not in a clear way. This has led to a lot of mis-selling of these assets to consumers for whom these assets are not suitable in view of their financial situation. This example shows there is a need to strengthen the DMFSD to ensure it adequately protects consumers from new and unregulated financial services and products coming onto the market in future, as such products can be very risky.

The EU Retail Investment Strategy

Finally, another key retail financial services initiative in the pipeline for this year is the EU’s retail investment strategy. This initiative should be used to make the retail investment market safe for consumers, including vulnerable consumers. Important issues that should be tackled in this initiative are, for example, that basic option products that are safe and suitable for any investors should be the default offer. This would ensure wider access and use of safe products for vulnerable consumers. In addition, inducements should be banned to guarantee quality of advice and remove conflicts of interest. Moreover, the initiative should be used to introduce shorter retail investor pre-contractual information documents that easily and clearly explain the key product features. This would ensure that these documents are more digestible and understandable for consumers.


EU regulation of retail financial services can fulfil the role of protecting vulnerable consumers in this crisis. However, it requires ambition from policymakers, and mobilisation of civil society to advocate for it. Get involved with Finance Watch now!

What can I do to help? How can I get involved?

Read the report ‘Tackling causes of over-indebtedness in the EU consumer credit market’

to learn about the problems on the EU consumer credit market and the measures that EU policymakers should take as part of the CCD review.

Contact the author or visit our website to learn more about Finance Watch’s work on financial inclusion issues and check out Finance Watch’s consultation responses to the DMFSD review and the retail investment strategy.

There are many ways to get involved with Finance Watch – sign up for our newsletter, learn about the benefits of becoming a member and follow us on social media!

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