The recent editorial in Investment Executive raises an important and ongoing debate about the efficacy of financial literacy programs and proposes a shift toward behavioural design as a solution to improving financial outcomes for Canadians. While the behavioural-design approach acknowledges the limitations of traditional financial education, the suggestion that diverting resources from investor education to this strategy alone can sufficiently address financial literacy challenges is an oversimplification. A more balanced and comprehensive approach is needed — one that prioritizes consumer-centric regulation alongside behavioural interventions.
The Financial Consumer Agency of Canada’s (FCAC) 2019 Canadian Financial Capability Survey highlights persistent gaps in financial literacy among Canadians. This issue is neither new nor unique, yet it remains a critical barrier to achieving better financial outcomes. The article rightly identifies that many consumers are not inclined to engage with financial education unless they face immediate and relevant decisions. Behavioural design leverages this reality by delivering information at the point of need and tailoring it to specific contexts. However, while this approach may improve decision-making in certain scenarios, it does not address the broader structural issues that undermine consumer confidence and financial well-being.
Behavioural design has shown promise in improving financial decision-making through timely nudges, simplified communication and decision aids. These interventions recognize the cognitive and emotional constraints consumers face and aim to make financial choices less intimidating and more intuitive. However, there are several limitations to relying solely on behavioural strategies:
Behavioural interventions often focus on specific decision points, such as encouraging savings or reducing fees. They are less effective in addressing more complex financial challenges, such as long-term retirement planning, understanding investment risks or managing debt over time.
Behavioural design tends to intervene at the point of decision-making. While this is helpful, it does little to build foundational knowledge or foster long-term financial resilience. Without a baseline understanding of financial concepts, consumers remain vulnerable to predatory practices and market volatility.
The success of behavioural design relies heavily on financial institutions adopting consumer-friendly practices. However, institutions may prioritize profitability over consumer protection, potentially undermining the effectiveness of these interventions.
Rather than diverting resources solely toward behavioural education, regulators and industry stakeholders should consider a broader, more consumer-centric regulatory framework. Such an approach would focus on creating a financial ecosystem where consumers are protected, informed and empowered through more accessible and transparent disclosure, more vigilant oversight and enhanced complaint resolution mechanisms.
One of the fundamental pillars of consumer protection is ensuring that financial products and services are presented in a clear and transparent manner. While plain-language communication is part of FCAC’s current priorities, more aggressive action is needed to overhaul disclosure practices. Key initiatives:
- Require financial institutions to provide concise, easy-to-understand summaries of key terms, fees and risks for all financial products.
- Develop digital platforms that allow consumers to compare financial products transparently, including real-time updates on costs and performance.
- Adopt a tiered approach to disclosure where essential information is highlighted up front, with additional details available for those seeking deeper understanding.
Behavioural design cannot substitute for robust regulatory oversight. Consumers rely on regulators to ensure that financial institutions operate fairly and transparently. Key areas for improvement:
- Enhance the supervision of high-risk products with complex fee structures or high potential for consumer harm, such as certain investment funds or payday loans.
- Increase the use of data analytics to identify and address emerging risks before they lead to widespread consumer harm.
- Impose meaningful penalties for violations of consumer protection regulations to deter misconduct and ensure accountability.
Effective complaint resolution is a critical component of consumer protection, yet many consumers find the process cumbersome and unresponsive. Improvements in this area could include:
- Establish a single, user-friendly portal for consumers to file complaints against financial institutions, with clear timelines for centralized complaint platforms resolution.
- Strengthen the role of independent ombudsman offices to ensure impartiality and fairness in resolving disputes.
- Publish detailed reports on complaint trends and resolution outcomes to identify systemic issues and drive continuous improvement.
The argument for reallocating resources from traditional financial education to behavioural design overlooks the importance of addressing systemic barriers through regulation. Behavioural design and financial literacy initiatives should not be viewed as mutually exclusive; instead, they should complement each other within a broader framework of consumer protection.
Financial literacy programs, while imperfect, provide consumers with the foundational knowledge needed to navigate complex financial systems. Behavioural design can enhance these efforts by providing just-in-time guidance. However, neither approach can substitute for a strong regulatory environment that prioritizes consumer interests through transparency, oversight and accountability.
Improving financial outcomes for Canadians requires a multifaceted strategy. While behavioural design offers valuable tools to enhance decision-making, it cannot replace the need for comprehensive, consumer-centric regulation. Regulators and industry stakeholders must commit to more transparent disclosure practices, vigilant oversight and robust complaint resolution mechanisms. By adopting a balanced approach, we can build a financial system that not only accommodates but actively empowers consumers to achieve greater financial security and well-being.
Harvey Naglie is a consumer advocate.