Consumer Financial Protection: Advantages, Dangers and Should it be a New Agency?

Widespread consumer credit defaults help make it clear that improved consumer protection is needed.  Had there been better protection prior to the financial crisis this would have ameliorated the severity of the crisis and might even have forestalled it.

However, there are dangers in a CFPA, dangers of over regulation and of stifling innovation.  Proposals for blanket prohibitions and for compulsory provision of plain vanilla products are probably a step too far.  The emphasis should be on improved transparency and on solving the market failure of inadequate information.

Many consumers lack knowledge and understanding in the financial area, so that disclosure alone is unlikely to be enough to solve the market failures in some areas.  Even if it avoids ex ante prohibitions, the consumer protection agency should look for situations where companies are exploiting the lack of consumer knowledge.  They should stop sharp practices and perhaps exact penalties on companies that have used them.

As a first choice, the U.S. should have a single conduct of business regulator protecting both small shareholders and consumers of financial products.  The SEC is the natural choice to be the conduct of business regulator and the home for a consumer financial protection agency.  As a second choice, a separate agency could serve, provided it has the appropriate structure and a staff that is balanced and knowledgeable about markets. This short paper makes these points by identifying key structural provisions of the Treasury's proposed CFPA, enumerating some concerns that have been raised about it, arguing for a more balanced perspective on consumer protection, and offering some recommendations.

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