In part also, it is a reflection of the real change which has occurred in the balance of power – especially of information – between providers and consumers over recent decades. A rebalancing of regulatory focus is necessary. Consumer protection is now becoming a core prudential issue, part of the process of creating a fair market infrastructure. But it is not a fundamentally new departure.
In an ideal market, individuals and corporations come together on an even footing and exchange goods, services and money at a mutually acceptable price. In theory, such markets should be inherently efficient and self-regulating. However, few if any markets achieve this ideal: there are always imbalances of power and information which give the upper hand to one side or another in an economic transaction. Throughout history, rulers and governments have intervened in markets to correct distortions of power or information by regulating prices, quantities or quality and by developing penalties and provisions for redress – or simply to ensure that the profits from those imbalances flow to themselves rather than to third parties.
Consumer protection has always been one of the core purposes of financial services regulation. While it is common to distinguish prudential from conduct regulation – increasingly so today with the creation of separate conduct regulators such as the Financial Conduct Authority (FCA) in the UK and the Consumer Financial Protection Bureau (CFPB) in the USA – the truth is that both activities seek to promote fair and stable markets for consumers in which participants can have confidence.
In today’s world, government intervention can radically change the financial outcome for consumers, who would otherwise have little control over their destiny. Requiring positive outcomes rather than inputs switches the onus on financial providers to ensure they offer products and services that responsibly satisfy customer needs as well as generating profit.
As ever, the consequences of failure to protect consumers are not just a cost of doing business – they can actually destroy value in the brand and shareholder value. Regulatory intervention will increasingly limit product offerings and entail scrutiny of business models. So incumbent management will begin to see the immediate consequences of failing the customer; no longer will these consequences manifest themselves only at some point in the future.