The Future of Consumer Protection: Remarks at Loyola University Chicago School of Law (original) (raw)
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Abstract: The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects.
Journal of Economic Perspectives, 2011
The recent financial crisis has led many to question how well businesses deliver services and how well regulatory institutions address problems in consumer financial markets. This paper discusses consumer financial regulation, emphasizing the full range of arguments for regulation that derive from market failure and from limited consumer rationality in financial decision making. We present three case studies-of mortgage markets, payday lending, and financing retirement consumption-to illustrate the need for, and limits of, regulation. We argue that if regulation is to be beneficial, it must be tailored to specific problems and must be accompanied by research to measure the effectiveness of regulatory interventions.
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Advanced technology, Big data, and complex AI/ML algorithms have provided benefits to both consumers and lenders. Fintech has a potential to disrupt and to create new types of risk. Regulators around the globe are working diligently and thoughtfully to provide consumer protection and to maintain financial stability while at the same time to create an environment for safe Fintech innovations.
Foreword: Consumer Financial Protection budget proposal in California
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This Foreword addresses the topic of consumer financial protection in California, which is likely to have considerable bearing on the same topic throughout the country. Presented below is testimony provided to the California Assembly in March 2019. 1 That testimony gave the first push to encourage the State of California to step forward and consciously seek to fill a gap left by the recent retreat of the U.S. Consumer Financial Protection Bureau. That federal agency, which I headed as the first director, has as its sole mission the responsibility to protect and support consumers in the financial marketplace. 2 During my tenure, which lasted six years, we sought aggressively to fulfill this role and level the playing field for consumers and families who deal with large financial companies, against strenuous opposition from the financial industry and frequent criticism from political opponents. After my departure, however, the new leadership explicitly reversed course, pulling back sharply to use its powers of regulation and enforcement less vigorously. These events are canvassed in my recently published book, Watchdog, which provides considerable detail about the need for consumer financial protection in America and how that need can be addressed more effectively. 3 Against that backdrop, it became more important for the state governments to protect their own people against fraud and abuse in financial markets, without relying on the ebbs and flows of policy made in Washington. 4 California, as the most populous state with the largest economy, seemed a natural candidate for leadership in this regard, and the testimony that follows was designed to advocate such an enlarged role. In the year since, Governor Gavin Newsom has embraced the spirit of this testimony and moved beyond the original legislative proposal. In his proposed budget released on January 10, 2020, he set out to overhaul the existing
The recent financial crisis has led many to question how well businesses deliver consumer financial services and how well regulatory institutions address problems in consumer financial markets. In response, the Obama administration proposed a new agency to oversee consumer financial services, and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act embraced the Administration's proposal by creating the Bureau of Consumer Financial Protection. Other regulatory reforms have been advanced, and in some cases adopted, in recent years, at both the federal and state level. In this paper, we provide an overview of consumer financial markets, detailing the purposes they serve, the extent to which they suffer from market failures or other deficiencies, and the structure of our current system of regulation. To illustrate our analytical framework, we present case studies on retirement savings, residential mortgages, payday lending, and mutual funds. We conclude with a series of observations on the limits of government intervention, suggestions about how to measure whether government intervention is successful, and potentially fruitful lines of future research and data collection.
Analyzing the Role for a Consumer Financial Protection Agency
SSRN Electronic Journal, 2000
In the debate over the proposed establishment of a new Consumer Financial Protection Agency, much attention has been given to discussion of whether consumers are irrational or incompetent and therefore need paternalistic regulators to look after them, and whether inadequate consumer protection regulation was a contributor to the financial crisis. Arguments over these questions are misplaced. Consumer protection regulation is commonplace in financial markets, and is essential even where consumers are fully rational and financial crises are distant. The potential role for a CFPA should first be examined based on consideration of the benefits and shortcomings of current consumer protection regulation, and how a dedicated consumer protection regulator would be likely to change things. Specific details of proposed legislation that affect the structure and authority of a CFPA should be evaluated separately rather than being used to determine whether such an agency is a good idea or a bad one. Consideration of the general principles for and against establishment of an independent CFPA may help to illuminate the strengths and weaknesses of specific legislative proposals.
SSRN Electronic Journal, 2014
The recent financial crisis was a powerful reminder that the inherent instability of the monetary-financial system is likely to entail serious consequences for the real economy. In the U.S., the monumental Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act") has provided legislation that aims to institutionalise several aspects a new thinking on financial stability. In addition to the interagency Financial Stability Oversight Council ("FSOC"), the creation of the The Consumer Financial Protection Bureau ("CFPB") marks an important departure from the U.S. regulatory tradition of decentralized agencies whereby the institutional locus of financial oversight depended on the precise nature of the legal structure of and business activities pursued by individual financial intermediaries. In its mandate and institutional structure, the CFPB unifies both "micro-prudential" and "macroprudential" principles of financial regulation to enhance overall financial stability. From an historical perspective, the creation of the CFPB does not change the regulatory landscape to the same extent as did the creation of the Federal Reserve after the Panic of 1907 or the creation of the FDIC after the 1933 Banking Crisis. At the same time, however, the CFPB represents an important historical shift in the policy focus of U.S. financial regulation away from bank stability bank to a broad notion of financial stability that recognises the increased financialisation of households' welfare.
The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies
SSRN Electronic Journal, 2000
The recent financial crisis has led many to question how well businesses deliver consumer financial services and how well regulatory institutions address problems in consumer financial markets. In response, the Obama administration proposed a new agency to oversee consumer financial services, and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act embraced the Administration's proposal by creating the Bureau of Consumer Financial Protection. Other regulatory reforms have been advanced, and in some cases adopted, in recent years, at both the federal and state level. In this paper, we provide an overview of consumer financial markets, detailing the purposes they serve, the extent to which they suffer from market failures or other deficiencies, and the structure of our current system of regulation. To illustrate our analytical framework, we present case studies on retirement savings, residential mortgages, payday lending, and mutual funds. We conclude with a series of observations on the limits of government intervention, suggestions about how to measure whether government intervention is successful, and potentially fruitful lines of future research and data collection.
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This paper aims to identify and challenge the common practice among financial institutions of designing and selling complex financial products to consumers who lack full comprehension, thus preventing them from making informed decisions before consuming such financial products. This deceptive approach leads many consumers to experience financial losses, with significant negative consequences for society as a whole. The paper delves into the motivations behind financial institutions to produce and successfully sell complex financial products; they flourish, mainly because they often take advantage of the inadequate regulatory systems, amongst other things. Furthermore, it explores the enabling environment created by laissez-faire contract, which prioritizes principles like pacta sunt servanda and caveat emptor, resulting in regulators overlooking and undervaluing the abuse faced by financial consumers, leaving them largely responsible for resolving their own challenges. The paper exposes the shortcoming of policy measures aimed at preventing consumer exploitation, including the flawed disclosure rules that place the burden of comprehension on consumers while being manipulated to undermine their full understanding. Additionally, it critiques the use of complicated language and heavy use of financial jargon in financial information booklets, which, although meeting legal disclosure requirements, hinder the comprehension of consumers.To address these issues, the paper proposes a new disclosure rule grounded in the concepts of caveat venditor and contra proferentem. This rule would require financial institutions to present information against their own self-interest and provide an equal number of disadvantages alongside advantages for the products they offer. Furthermore, it suggests that regulators and courts should play a pivotal role in supervising and assessing compliance, issuing annual performance-rated certificates that financial institutions must prominently display in their establishments and incorporate into their product information leaflets. This approach would allow consumers to easily identify consumer-friendly financial institutions.
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Financial regulators are challenged to respond to the innovation opportunities presented by financial technology (fintech). Current rules are not necessarily sufficient or effective to adequately regulate new business models and new products relating to innovations such as crypto assets or digital financial services. Regulators that fail to respond in a timely manner may drive innovation offshore and deprive their markets and consumers of appropriate, new services. To respond to new financial innovation, regulators have been establishing innovation hubs and regulatory sandboxes. Innovation hubs enable them to engage innovators more effectively. Sandboxes allow the products to be tested in a controlled environment and enable to regulator to consider whether existing laws are appropriate to regulate such products and, of not, what measures may be required. Sandboxes are however resource intensive and they hold a number of risks. Financial regulators are, of course, not alone in having...