Does Financial Regulation Unintentionally Ignore Less Privileged Populations?
In recent decades, financial regulation around the globe has transferred responsibilities from governments and employers to individuals. To help in the decision making process, regulators emphasize transparency and disclosure, with the aim that individuals will use this available information rationally and in their best interest. In addition, technological advancements have enabled regulators to use digital media and websites as platforms for promoting different initiatives. These platforms are supposed to promote direct interaction and provide information in a timely manner while bypassing intermediaries. However, this transfer of responsibilities to the public, combined with the increased use of technology by the regulators, has been criticized. The fear is that the regulation can be unsuccessful if people do not respond as intended, or if people are not equally exposed to it.
In our recent paper; "Does Financial Regulation Unintentionally Ignore Less Privileged Populations? The Investigation of a Regulatory Fintech Advancement, Objective and Subjective Financial Literacy", we try to answer the question of whether once a regulatory fintech advancement is introduced, whether all individuals receive the needed information and whether they act upon it, using an Israeli regulation as a case study.
In 2013 the Israeli regulator reached out to the population, recommending the use of a website to help individuals find inactive retirement savings accounts and close them (withdraw the savings or transfer them to active accounts). A year after that, a second campaign in the form of a tax exemption on savings withdrawn from small inactive accounts in provident funds was launched. Its aim was to encourage individuals to close small inactive accounts, thus avoiding new minimum management fees that would gradually exhaust the savings. The importance of the campaign and the need to close the accounts at the given fixed minimum management fee can be illustrated by the following example: with this fee an inactive account of 100 USD with a 6% annual return rate will completely exhaust itself in approximately 6 years. The first campaign targeted the general population and was publicized in prime-time advertisements in television, radio, and the Internet. The second campaign, regarding the tax exemption, was not as broad but still used wide media.
The government’s efforts did not result in the closure of most of the inactive accounts and by end of the second campaign, only 15 percent of the eligible accounts for tax exemption had been closed. Proprietary data indicate that those who closed the inactive accounts have a higher socioeconomic index and live in central locations. Survey data indicate that those who lacked financial literacy and confidence in their financial knowledge were less likely to be aware of the campaigns and take financial actions. From this we conclude that the current policy of informing the public about regulatory changes via the mass media and the use of a website does not reach all the population equally.
Using a controlled field experiment, that investigated the effectiveness of different communication methods on the awareness and actions of an underprivileged population, we demonstrate that more personal (and detailed) digital interventions and interventions that include a human touch can be more effective. Transfer of financial information using these interventions can increase the awareness and activeness of underprivileged populations. For example, face-to-face explanations and e-mails that include a video presentation by a person are effective ways to relay financial information to the public that can be easily and widely used in future consumer financial regulations.
Maya Haran Rosen, Bank of Israel
Orly Sade, Hebrew University