Access to basic bank accounts and to consumer credit have become increasingly important in the modern economy, as a larger share of the world's population uses financial services for essential transactions and savings, in a process stimulated by online commerce. These innovations, and in particular more accessible consumer credit, strengthen the purchasing power of individuals, enhance consumer welfare and can reduce poverty if used in a responsible way. However, the rapid development of credit products and the sharp increase in the use of financial services, particularly in emerging market economies, have been accompanied by a rise in irresponsible lending practices and over-indebtedness of consumers. As shown by the 2008 financial crisis, sparked by a housing bubble created by excessive lending, effective consumer protection is required to promote financial stability. As a result, new reforms were introduced at both national and international levels, where a set of high level principles and good practices have been developed to improve financial consumer protection.
While international principles provide a basic framework for consumer protection, they remain abstract and generic in practice, and are non-binding in nature. This raises the question of how they may influence national legal systems, in particular those in emerging and developing economies, where financial consumer protection is crucial. Developing countries are most vulnerable as they are sometimes exposed to rapid changes (e.g. the penetration of financial services increasing dramatically), while their users generally lack experience and an understanding of financial products. On the other hand, regulators often struggle to keep pace with new developments in financial markets and may be reluctant to intervene as the provision of credit is regarded as beneficial for the economy.
This project aims to assess how financial consumer protection can be strengthened effectively to promote growth, enhance financial stability and increase consumer welfare. The project will focus on consumer credit regulation and deposit protection, exploring different conceptual models to enhance financial consumer protection: among these, social inclusion of vulnerable consumer, empowerment via the capability concept, and responsible lending.
Central aspects of consumer protection in the banking sector will be examined, such as:
- Inclusion: Access to financial services accounts and credit
- Transparency: How much disclosure and which form of consumer information is most effective?
- Knowledge: Financial education and literacy
- Sustainability: Responsible lending, fairness and avoidance of over-indebtedness
- Redress: Compliance and enforcement
The project will apply a comparative and empirical research method. It will compare different regulatory solutions applied in four different national and regional legal systems: South Africa, Peru, Indonesia and the EU. Furthermore, it will apply an empirical approach designing a questionnaire to assess the current state of financial consumer protection, to identify key consumer challenges and regulatory gaps. Finally, it will propose a mix of regulatory instruments and best practices to promote a coherent approach to financial consumer protection in the banking sector.
|Phase 1:||Mapping the international and national legal frameworks of particular countries on financial consumer protection in the banking sector|
|Phase 2:||Analysis of different concepts that might help to understand and improve financial consumer protection, including responsible lending, financial inclusion and capability|
|Phase 3:||Drafting a questionnaire on financial inclusion, responsible lending practices and financial capability|
|Phase 4:||Evaluation and comparison of the legal and empirical study|
|Phase 5:||Formulation of recommendations to strengthen financial consumer protection in the banking sector|
Current Phase of implementation:
Dr Iris Benohr
Lecturer, School of Law
Queen Mary, University of London, UK
Economic Affairs Officer
Competition and Consumer Policies Branch (CCPB)