Tuesday, 4 January 2011

The intersection of financial exclusion and vulnerability in the context of access to and use of credit

On 16th December 2010, the EU Commission has adopted the European Platform against Poverty and Social Exclusion to reach the social objective of EU 2020 Strategy. Consequently, fight against poverty is at the heart of goals for jobs and growth.
This approach endeavors to integrate financial exclusion, as a particular factor of vulnerability and disadvantage (see ‘challenges section’ p.6). To a large degree, access to (specially low cost) credit is at the crossroads of contracts and consumer laws. Thus, it has many directions which may interact with the concept of vulnerability.
In 2009, a European study on Financial Inclusion Indicators allowed the collection of information concerning financial inclusion in eleven Member States of the European Union(Belgium, Bulgaria, Germany, Greece, Spain, France, Ireland, Italy, Netherlands, Poland, Slovakia) and Norway measured the level of exclusion on the basis of the following definition: ‘Financial exclusion refers to a process whereby people encounter difficulties accessing and/or using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a normal social life in the society in which they belong’. As such, it will be understood that financial exclusion is not reduced solely to non-access to a bank account, but also that it is possible that the access is not accompanied by a satisfactory usage. This last point can be called into question by a series of various elements: cost, lack of satisfactory information, complexity of use. As far as the regulation elements that impact adequate credit supply concerns, the study assessed regulatory practices such as: the registration of lenders and intermediaries, the existence of a ceiling rate, the reliability and solvency measurement framework and the effectiveness of these measures, the publicity framework. In relation to the later the study showed that still exists important disparities regarding the minimum informative contents which publicity must have regarding credit in the EU. The four fields of information most often used are: cost, refunding plan, APR(annual percentage rate of charge) and terms and conditions.
Furthermore, the issue of financial exclusion raise a question on what might vulnerability mean in the context of access to and use of credit. From a theoretical and comparative perspective, there has been some interesting initiatives that attempts to define the -dynamic concept- of consumer vulnerability, among those are worthy to mention:
- The report of the Expert Workshop on Ways and Means to Enhance Social Protection and Reduce Vulnerability (published by United Nations Department of Economic and Social Affairs in 1998), in which the formulation of the meaning of vulnerability implies an the state of exposure to the chance of injury or loss (associated with the concept of risk). Therefor, a person's degree of vulnerability will be influenced by two categories of factors: a) ability to protect or to defend oneself against the chance of injury or loss, and b) ability cope with the negative consequences of injury or loss.
- The UK Better Regulation Task Force defined vulnerability by reference to individual capacity(person's overall mental and physical capacities) and circumstances(income status, age, race or ethnicity, gender, health status, level of education, labour force -employed or unemployed-etc and so on). See Protecting Vulnerable People (published by Better Regulation Task Force UK in 2000).
- The discussion paper on What do we mean by ‘vulnerable’ and 'disadvantaged’ consumers? (published by Consumer Affairs Victoria in 2004), in which the concept of consumer vulnerability has been defined as follow: “Is exposure to the risk of detriment in the process of consumption due to the interaction of market, product and supply characteristics and personal attributes and circumstances. The main cause of vulnerability is this interaction resulting in inadequate information, poor access to information and/or ineffective use of information by a consumer or in deterrence of complaint or the pursuit of redress by a consumer ”.
Overall, these definitions emphasises information issues as key factor that cause vulnerability in consumer credit transactions. Consequently, consumer vulnerability is view as a result of the interaction of particular market or transaction characteristic(that in the case of consumer credits , and specially the use of high cost credit, implies complex pricing schemes and high transaction costs)which may create information problems, with personal capacities and circumstances that affect consumers' access to and processing or use of information. In the context of use of consumer credit, its has been largely reported how psychological factors (cognitive limitations), imperfect information constraints decision-making and have an impact on the effectiveness of policies adopted to prevent financial difficulties. For instance, at the point of decision individual borrowers may suffer from biases in relation to product attribute estimation and evaluation, positive confirmation bias, temporal and uncertainty discounting, social norms and signals. As well as, biases that includes weakness of the will (which leads them to underestimate their level of self control) and optimism bias(which leads them to underestimate the risk of adverse event, e.g. such as loss of job), which in turn leads them to borrow more than they ought.

With regard to consumer credits, there are a number of ways in which consumers may lack the information they need to make optimal choices. For example, they may lack information on the function of various credit products and how they relate to their credit needs, on product attributes and pattern mistakes, or on the legal framework of the contract. Furthermore, they may have a poor understanding of their needs and preferences for credit. It has been argued that, in theory, there are three main types of information that consumers are likely to know when considering making a purchase: the price, the quality of the product, and the terms of trade. The bottom line is, that there is a need carry out empirical research into and understanding of information problems in the context of consumer credits. In addition, to need of a conceptual framework necessary to guide research and policy development efforts if concern that vulnerability is to be translated into effective assistance.
Finally, the communication on European Platform against Poverty and Social Exclusion to reach the social objective of EU 2020 Strategy also mentioned: ‘Access to financial services for the most vulnerable can be enhanced through internal market and consumer policies’(see ‘sectoral policies’ section, p.12).

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