Throughout the boom years both banking regulation and consumer protection failed to prevent financial intermediaries’ excessive expansion of credit. Like balloons, banks expanded their balance sheets to a point where they had to burst. What is now needed is a reformed, systemic bank regulator to protect banks from themselves and a consumer financial protection agency to protect ordinary people from banks and other financial firms.
In the US a new body, the Consumer Financial Protection Agency is being created in response to what is seen as a spectacular failure to protect citizens from banks excessive, value destroying financial intermediation. The response here has been muted, with no public enquiry yet into what went so badly wrong in Ireland.
“Safe as houses” was coined during the Great Depression to convince people it was safe to borrow long term to buy their own homes. Today such action, now termed behavioral economics, sees Governments and others look to influence ordinary people’s consumption, savings and borrowing behaviors.
As in the US, economic policy here influenced people’s behavior as consumers. Both the property bubble and consumer spending boom were wholly reliant on excessive credit provided by financial intermediaries who engaged in misselling on a gigantic scale. Borrowing vast sums from abroad to make excessive loans here, our banks became the most economically destructive force in the history of the state.
IFSRA, the Financial Regulator, is a carbon copy of Britain’s “Financial Services Authority” which evolved from a number of self-regulatory agencies. Dominated by career central bankers, it interpreted its role through the lens of a prudential banking culture with its roots in “principles” based regulation from a time when financial firms self-regulated through cozy cartels. Principles for bank safety and soundness are established and banks get on with the business of maximising shareholder value as long as they satisfy the regulator that they have applied the principles to their business operations.
Regulators such as IFRSA have twin conflicting mandates. These are to ensure bank safety and soundness and to protect consumers. Safety and soundness means profitability. And as unfair, abusive and deceptive practices can be highly profitable, consumer protection is trumped by prudential regulation save for the most egregious of practices more often than not exposed here by whistleblowers in the media.
Bank regulators look on consumer protection as a tool to regulate financial firms, which makes life easier for the regulator. Protecting consumers is dominated by the notion that improving financial literacy creates wise, educated, experienced citizens who as consumers are capable of self-regulation. This notion holds that “a person’s vulnerability to misselling is a matter of their imprudence which is most effectively controlled by them acquiring the basic knowledge and confidence to ask the right questions and to seek out the products that best suit them”.
Protection also requires financial firms to disclose basic price information, print health warnings and allow for cooling off periods. The objective is to provide information so that consumers can make an informed decision. Financial advice or selling must be done in a certain way for certain types of products. But critically there is no review of new or existing financial products for safety. Nor is there a requirement to modify dangerous products before they are marketed to the public. Generic high level product regulation does not stipulate minimum safety standards and only applies to regulated firms.
Banks create value by making more credit available to people who would safely use it. But it is possible for people to have access to too much credit as happened here. Products and services were designed to allow consumers borrow more than they ought to have or could prudently afford to repay. Marketing tricks encouraged people to behave as if they could afford to buy cheap abundant credit without fear.
Government policy considers consumer protection subordinate to ensuring the profitability, safety and soundness of financial firms. It does not extend to protecting consumers from themselves or from firms more dangerous products. It believes in a form of citizen that doesn’t exist - the rational, financially literate, well informed, self-regulating consumer. So consumer protection is crafted to make regulating financial firms easier and reduce public expectation of the Financial Regulator’s responsibility for the state of the market.
Regulating financial products is always met by a powerful industry lobby on one side that is not be balanced by an equally effective consumer lobby on the other.
What’s needed is a US style consumer financial protection agency that protects consumers from excessive and destructive innovation by financial firms; polices unfair, deceptive and abusive practices; whilst also ensuring they can continue to innovate.
No comments:
Post a Comment