Consumer Protection and Competitive Markets: Two Sides of the Same Coin

If Justin Bieber showed up to sing at his high school’s homecoming dance, I imagine that in some ways it would resemble when Elizabeth Warren addressed the Consumer Federation of America’s annual Financial Services conference last week. The venue was packed with onlookers filling the seats and lining the walls both standing and sitting (including me, and as a personal request to conference organizers for next year, more chairs, please). Many of the people there, and the CFA itself, were early supporters of her idea of creating an agency within government charged with consumer financial protection, and since the CFPB was established in the Dodd-Frank financial reform legislation earlier this year and Elizabeth Warren was charged with getting it off the ground, there was a sense of shared ownership among participants of that accomplishment.

After thanking the crowd for their work to bring what she said many viewed as a pipe-dream into fruition, she spoke of the mission of the CFPB, but then pivoted away from discussing regulation as a method of inoculating consumers from abuses within the market as an end unto itself and focused on regulation as a method of enhancing the functionality of the market. To illustrate her point, she relayed a recent conversation she had with a credit card CEO.

“[He] told me that his company used to compete based on the actual cost of credit cards. The company reduced the price of its card and explained the lower price up front--no surprise fees or interest rate re-pricing were hidden in the fine print. His competition was considerably more expensive, so that should have been a winning strategy. But the competition advertised their cards as much cheaper--counting on the fact that they would make their profits on the back end with various fees, charges, and interest rate increases. In a market in which competitors can obscure the price of credit, the CEO explained that when he made the cost of credit clear up front, his card seemed more expensive and he could not launch a profitable business.” 

Reframing "consumer protection" as "market enhancement" squarely takes on criticisms that regulation is to the detriment of a competitive market, necessarily stifling innovation, and resulting in onerous compliance burdens for industry while reducing choice and increasing costs for consumers. Rather, establishing standards for products and practices and creating a level playing field removes incentives to profit from engaging in excessively risky behavior, like the "race to the bottom" practices that were pervasive in the mortgage market before the  housing collapse, and makes room for the good actors to compete.

The challenge for the CFPB, she said, is to foster the same support for its mission as other regulatory agencies enjoy.

“The work of those agencies enjoys widespread support because it limits risks that consumers cannot detect on their own at the time of purchase. Thanks to federal agencies, no one competes in the pharmaceutical industry by substituting cheaper baking soda for aspirin. Thanks to federal agencies, no one competes in the auto industry by leaving out the brakes or making the seat belts out of flimsy fabric. And thanks to federal agencies, no one competes in the appliance industry by leaving the safety switches and insulation out of toasters. 

Those agencies have made the markets they regulate more efficient. Safety rules outlaw deceptive or dangerous innovations, making room for good innovation. Those agencies have also generated widespread support for their core missions from the American public.  When was the last time you heard a friend or colleague--Republican, Democrat, libertarian, or vegetarian--complain that the Federal Aviation Administration should do less to prevent plane crashes? Or that the Consumer Product Safety Commission should do less to protect infants from unsafe cribs?”

Here she demonstrates that establishing standards within an industry improves the perception of that industry, further connecting consumer protection and market enhancement. The financial services industry could replicate the success of other industries with strong consumer protections by supporting the legitimacy of the CFPB. I think it's fair to say that consumer confidence in the financial system had dwindled given the events of the last few years. Structuring over-draft fees to maximize the number of charges? You guys did that, right? And, giving people high cost loans you knew they couldn't afford? Ahem? What better way to build trust and get people to stop putting money under their mattresses than by throwing yourself at the mercy of the CFPB? Accounts are listed as "FDIC Insured, so work out an endorsement deal so that you can put a "CFPB approved" stamp on your products. You can preempt CFPB actions by volunteering changes that are compatible with a consumer driven business model (you guys always say you want to be self-regulating, so here's your chance). You can wait for regulation to go to you (won't be pretty) or you can go to it and be ahead of the curb and outpace your competitors. As you consider your options, just remember that you're dealing with the Justin Bieber of consumer protection; resisting only works up to a point.