| 1 European Credit Research Institute Understanding Credit Markets for Europe ECRI POLICY BRIEF ECRI POLICY BRIEF NO. 2 | JULY 2007 The European Commission and Financial Capability: Simplifying Financial Services Filipa Figueira he European Commission is taking initiatives to increase the financial capability of EU consumers: ensuring that they understand the financial products available in the market, are able to manage their personal finances efficiently, and can make informed choices between different bank accounts, insurance policies or credit agreements. The participation of several high-ranking EU officials at a conference on “Increasing Financial Capability”, hosted by the Commission in Brussels in March 2007, shows that the European institutions are taking this issue to heart. This ECRI POLICY BRIEF examins why these policies are needed, analyses the EU action in this area and assesses the likely future developments. WHY FINANCIAL CAPABILITY IS IMPORTANT At first sight, it may seem that the European Commission would have more pressing issues to give their attention to than whether consumers understand financial services. This could appear as a trivial matter, compared to promoting economic growth or to reducing unemployment across the European Union. However, there are two reasons why financial capability is important from a public policy perspective and deserves the careful attention of policy-makers. Firstly, from a consumer perspective, if people do not understand financial services they will not be able to choose the products that suit their needs. This is problematic at a time when people depend more and more on financial services to maintain their lifestyle, as the responsibility for financial decisions is shifted away from the government to individuals: many students have to take out personal loans to finance their university education, homeowners rely on mortgages to buy their homes and private pension schemes are becoming increasingly important as a supplemental source of income for retirees in many countries. At the same time, financial products are also becoming far more complex, making it difficult to choose between the different products on offer. For some, this lack of understanding can lead to financial problems and in the worst cases to over-indebtedness. Secondly, from an economic perspective, if consumers do not know how to make the best choices, the market for financial services will not function well. Markets depend on the ability of consumers to play their role by making informed choices between different products. Therefore, the efforts to create a Single Market for financial services can only bring benefits if consumers understand how to use it. Moreover, T E C R I