3. Demand-side risks
Demand-side risks relate to the characteristics and circumstances of consumers themselves. This chapter reports the most significant demand-side risks identified by responding jurisdictions. These risks include lack of financial literacy, over-indebtedness, lack of digital capability and insufficient income. The chapter also discusses additional sources of financial consumer vulnerability.
The second category of risks relates to the characteristics and circumstances of consumers. Figure 3.1 presents a heatmap of these demand-side risks, with the placement of each risk determined by how often jurisdictions selected it among the three most significant demand-side risks for 2022 (the x-axis) and whether those jurisdictions expected that the significance of that risk would increase, decrease or stay the same in 2023 (the y-axis). The following key findings emerge from jurisdictions’ responses to this question:
Some 73% of jurisdictions selected lack of financial literacy as one of the three most significant demand-side risks in 2022.
Over-indebtedness was selected by more than half of jurisdictions, and lack of digital capability was selected by around 43%.
Every demand-side risk was expected to increase in significance in 2023 with the exception of lack of financial literacy.
Note: The x-axis (horizontal) presents responses to questions asking for the top three demand-side risks in 2022. The y-axis (vertical) presents responses to a follow-up question asking whether jurisdictions anticipate the risk would increase, decrease, or stay the same in 2023. Risks to the right of the y-axis were selected by more than half of respondents.
Source: OECD Consumer Finance Risk Monitor Reporting Template 2023.
The most selected demand-side risk is the lack of financial literacy. Given the macroeconomic environment, many consumers are facing financial challenges. For consumers with low levels of financial literacy, financial management can be confusing and stressful because the marketplace for financial products and services is complex and changing at a rapid pace. Jurisdictions noted that given the complexity of the financial landscape, many consumers may lack an adequate understanding of the risks and opportunities of the financial products and services they use. In Indonesia, for instance, improvements in financial literacy are lagging behind growing levels of financial inclusion, suggesting a lack of awareness and understanding among consumers regarding the financial products and services they use. Greece and Slovenia mentioned that part of this lack of understanding stems from the fact that many consumers find the terms and conditions to be written in language that is too technical, or that the descriptions of financial products and services are full of jargon with which the average consumer is unfamiliar. Beyond financial literacy, this observation highlights how financial firms may fail to implement effective disclosures (see Section 4.2 in Chapter 2). Peru also noted that low levels of financial literacy may be associated with a lack of trust in formal financial institutions, further impairing these consumers’ abilities to manage their daily finances. Low levels of financial literacy also pose a risk to consumers if they are unable or unwilling to actively engage in financial planning such as planning for retirement (Singapore).
Jurisdictions mentioned financial education initiatives to help address low levels of financial literacy, (see Section 8.2.4 in Chapter 8). Other jurisdictions including Israel and New Zealand noted the relative shortage of campaigns to promote financial literacy, despite its relevance and importance. As consumers face more sophisticated and complex financial instruments, this may also put them at risk of misuse or being victims of financial scams and frauds.
On average, jurisdictions anticipated that significance of this risk would slightly decrease in 2023. In general, jurisdictions noted that despite improvements in recent years, gaps in financial literacy persist. Even as consumers gain skills and knowledge, they noted, the complexity of products on offer continues to grow.
The second most-selected demand side risk is over-indebtedness. Considering the macroeconomic situation with elevated interest rates and high inflation, jurisdictions are concerned that consumers could make greater use of credit to meet financial obligations, which would increase indebtedness. Results from the Financial Consumer Agency of Canada’s COVID-19 Financial Well-being Survey showed that overall debt levels of Canadians had increased since 2019. The survey results also showed that Canadians were becoming more likely to borrow to pay for daily expenses, while the rise of consumers with insufficient income to meet daily expenses also led to an increase in reverse mortgages, private mortgages and more individuals being under-insured. The United Kingdom noted that many debt advice charities and consumer organisations had reported an increase in demand for debt advice, especially from those in the most desperate circumstances.
Jurisdictions noted that this trend of over-indebtedness is exacerbated by the rise of new products and services such as Buy Now Pay Later and payday lending. South Africa and Thailand noted the high costs for households to be over-indebted; some households must spend over half of their income to service debt. Slovak Republic emphasised how over-indebtedness could also threaten the stability of the financial sector. On average, jurisdictions anticipated that over-indebtedness would increase in 2023, citing a range of factors including rising interest rates, wage increases lagging behind inflation, rising unemployment and increased uptake of alternative and in some cases unregulated means of obtaining credit (e.g. Buy Now Pay Later, payday loans, illegal money lending). See Box 5.1 in Chapter 1 for details on BNPL and Section 4.1.1. in Chapter 4 for details on responsible lending regulation.
The third most-selected demand side risk is a lack of digital capability. The quick growth of new business models, the digitalisation of the financial sector and the rapid growth of fintech innovation make digital capabilities even more vital. However, consumers with lower levels of digital literacy or limited digital capabilities may be excluded from increasingly digitalised processes. As noted in responses from a number of jurisdictions, consumers who lack digital capabilities could face reduced access to banking services, especially if bank branches close. Hungary noted that consumers who lack reliable internet access and smartphones cannot access information that is provided on websites or social networking sites. Mauritius noted that a growing elderly population calls attention to levels of “tech-savviness” among elderly consumers. Jurisdictions agreed that consumers with low levels of digital capability and digital financial literacy would find it difficult to engage with the financial sector and could be more susceptible to harm, including financial scams and frauds. This could include, for instance, situations where consumers are not able to make fully informed decisions and fall prey to pushy sales techniques such as pre-ticked boxes to purchase insurance for a product. Countries and jurisdictions anticipated that the significance of this risk would increase in 2023, in part due to demographic trends.
Insufficient income was selected by nearly 40% of jurisdictions as one of the most significant demand-side risks in 2022. This risk is closely tied to over-indebtedness and rising interest rates and inflation. Many jurisdictions were concerned about how households could support themselves on inadequate incomes when the costs of living and borrowing were increasing significantly. In Peru, the pandemic significantly affected the financial resilience of Peruvians as around 85% of the population, at some point, were not able to cover their expenses with their income. This situation caused Peru’s poverty levels to rise to 27.5% in 2022 (which meant a setback to levels last seen in 2011).
Further, respondents highlighted how insufficient income could force consumers to make financial decisions that could further heighten their vulnerability (e.g. taking payday loans, forfeiting insurance policies). On average, jurisdictions expected that the significance of this risk would increase in 2023, due to wages not increasing sufficiently to keep pace with general costs of living.
Relatively fewer jurisdictions selected the remaining demand-side risks: ageing population, underinsurance, unemployment and other sources of vulnerability.
Ageing population. Respondents from Canada, Greece, Italy, Japan, Mauritius, Poland, Romania and Singapore expressed concern over their ageing populations and the impact this would have on their economies, social safety nets and financial well-being of society. Jurisdictions foresaw that financial vulnerability of retail investors could increase, due to lower digital competences of the elderly. Moreover, as people live longer and the workforce shrinks, individuals will face an uphill struggle to fund longer retirements.
Since 2018, the ACPR (Prudential Supervision and Resolution Authority) and the Autorité des marchés financiers of France have conducted work on marketing of financial products to vulnerable elderly populations. The aim of this work is to make all stakeholders safer and to limit the risk of mis-selling for these customers and financial institutions. Based on initial work in 2020 the authorities called on professionals in the insurance, banking and financial sector to exercise enhanced due diligence on vulnerable older customers and to apply by 2022 the findings of thematic workshops held in 2020.
Consumers experiencing vulnerability. Beyond specific demographic groups, such as the elderly, jurisdictions also mentioned increasing numbers of consumers generally experiencing financial vulnerability as a significant demand-side risk. In the United Kingdom, for example, a May 2022 survey found that over half of all UK adults showed one or more characteristics of vulnerability. In general, vulnerability could stem from different factors, including natural catastrophes, temporary income shocks, or consumers with health issues or a disability. This also could include consumers who have limited fluency and/or literacy in the official language of their jurisdiction. Jurisdictions that selected this demand-side risk anticipate that this risk will increase in 2023.
Consumer vulnerability and related topics such as financial well-being are strategic themes for the Task Force especially in light of factors such as the experience of the COVID-19 pandemic and changing economic conditions. The updated High-Level Principles on Financial Consumer Protection also underscore the importance of paying special attention to the treatment of consumers who may be experiencing vulnerability. In this context, the Task Force approved a workstream on “Understanding and Responding to Consumer Vulnerability” in October 2022. This workstream aims to:
articulate an understanding of consumer vulnerability and how it is relevant in the context of financial services
analyse policies relating to consumer vulnerability in the context of financial consumer protection
The output of the project will be a report by the Task Force on the development, implementation and effectiveness of protections for consumers experiencing vulnerability, including identifying effective approaches and examples from jurisdictions. The aim of the report will be to assist jurisdictions that are developing or enhancing their approach to consumer vulnerability and support the implementation of the High-Level Principles on Financial Consumer Protection.