Over the past five years, the European Union and the United States have been facing the greatest collective economic crisis since the Great Depression. Failing banks, mountainous debt, minimal consumer savings and disastrous unemployment rates threaten our countries’ immediate and long-term financial well-being. How we respond to this crisis, and how we apply the lessons of our own culpability in allowing this to happen, will go a long way in determining whether the EU and the US can regain their moral and financial standing in the world.
As we tackle this difficult challenge, it is essential that the needs and voices of ordinary consumers be put at the forefront of our decision making. This clearly has not been the case recently and we’re paying the price right now. After two decades as a consumer advocate, our current crisis came as no surprise to me or my colleagues. It has been clear to us since the late 1990s that many of our nation’s big institutions had lost their way. We watched our economies grow dependent on consumer debt and simultaneously encouraging the reduction of those very same consumers’ real incomes and savings. We watched as big banks recklessly disregarded the needs of consumers and investors, as well as their own long-term safety and soundness, for immediate and irresponsible profits. As we watched this happening, consumer advocates warned our governments in their race to “deregulate” and “harmonise” that the failure to rein in this thoughtless and dangerous behaviour and to properly protect their nation’s consumers would lead to collective financial ruin. And as consumer voices were ignored, that’s exactly what happened.
What should be clear to everyone by now is that the central blame for the breakdown of our economies ultimately lies with the dishonest and unfair banking practices of the world’s largest financial institutions. The lending these multinational companies conducted, with ridiculously complex and opaque financial instruments, was negligibly underwritten, unsuitable and unsustainable for borrowers, arranged by people not bound to act in the best interests of the borrower, and filled with terms so complex that many individual consumers (and investors) could not fully understand the nature or magnitude of the risks they were taking.
Had our governments put the needs of ordinary consumers first and provided effective protection that had truly punished institutions engaged in these practices, much of the current economic disaster could have been averted. Unfortunately they did not, and unfair and deceptive practices prospered. Simply, when financial institutions do a cost-benefit analysis of regulation and determine that unfair and deceptive practices not only go unpunished, but are actually rewarded, then those practices will ultimately become standard industry behaviour.
So how do we create a fair and just consumer-centric regulatory scheme? First, it is essential that we allow all levels of government to participate in the development of consumer protection regulation. Because much of the financial services industry operates cross-border, these companies must be monitored internationally, as their behaviour carries risks into every market in which they do business. Additionally, while it is important that we create international standards of financial service industry behaviour, these standards–and the desire for international harmonisation– must not stymie early action or stronger standards by individual nations. Conversely, it is equally essential that international regulators prevent these institutions from avoiding one country’s stricter regulations by “exporting” their home country’s more lax regulations, thus leading to a competitive race to the bottom among countries seeking to attract corporate headquarters.
Second, on the national level, where much of the regulatory failure occurred, consumer protection law must be seen as an essential part of creating a robust and sustainable marketplace and economy. For our economies to function properly, the financial services market must be built and structured from the consumer’s perspective. Transparency, substantive restrictions, effective and robust enforcement and sufficient consumer consultation rights must be built into a well-managed and well-regulated financial services structure.
Finally, in developing these viable and effective consumer protection schemes, national governments must allow for a strong concurrent and complementary role for provincial or state government regulators. This level of government can provide necessary early enforcement of existing standards and also develop new standards to address emerging practices before they cause widespread consumer harm or systemic risk. State and provincial legislatures are often in a unique position to spot and stop bad practices before they become universal. To ensure rapid and appropriate responses to abuses in the financial credit markets, consumer protection and regulation of financial institutions must be allowed at all levels of government.
Our current financial crisis need not have happened and it need not ever happen again. We must always remember that in our ever more complex and inter-related world, the motivation and interests of financial institutions often conflict with the general well-being of ordinary consumers and the long-term economic soundness of our nations. Only with a carefully constructed and multi-governmental regulatory scheme that places consumers and consumer protection at its centre will we have a fair and honest local and global marketplace that is safe and stable, and not subject to another corporate-driven financial meltdown.
©OECD Observer No 290-291, Q1-Q2 2012