Product Safety Regulation as a Model for Financial Services Regulation
Warren, Elizabeth, The Journal of Consumer Affairs
Because of product safety regulations, exploding toasters and other dangerous products are rare in the American marketplace. Despite the fact that financial products can also be dangerous, with terms as incomprehensible as an electrical wiring diagram, regulation is far less comprehensive. Most financial regulation turns on the identity of the issuer--federal bank, state thrift, and private issuer--rather than on the product itself. Instead of using safety experts, financial products are regulated mainly by agencies whose principal responsibility is to protect the profitability of the financial institutions that issue the products. A Financial Product Safety Commission would provide coherent regulation of financial products, eliminating their most dangerous features.
It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street--and the mortgage would not even carry a disclosure of that fact. Similarly, it is impossible for the seller to change the price on a toaster once the customer has purchased it. But long after the credit card slip has been signed, the credit card company can triple the price of the credit used to finance your purchase. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards?
Differing legal paradigms have created wholly different markets. Nearly every physical product sold in America has passed basic safety regulations well in advance of being put on store shelves. Thanks to effective regulation, innovation in the market for physical products has led both to more safety and to cutting-edge consumer-pleasing features. But credit products are creatures of contract law, thinly regulated by a tattered patchwork of federal and state laws that has failed to adapt to changing markets. As a result, innovation in financial products has produced incomprehensible terms and sharp practices that have left families at the mercy of those who write the contracts.
The consumer credit industry refers to its various offerings as "financial products," an apt term for something sold to the public with none of the give-and-take negotiations associated with a contract. Acquiring a credit card is as take-it-or-leave-it as acquiring a toaster--no custom features or haggling with the manufacturer over pricing. Missing from the financial products market, however, are basic safety regulations that protect consumers in other markets from exploding toasters, collapsing car seats, and tainted meat.
Consumers entering the market to buy financial products should enjoy the same protection as those buying household appliances. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, a new regulatory agency--a Financial Product Safety Commission (FPSC)--would protect consumers who use financial products.
For a growing number of families steered into overpriced credit products and misleading insurance plans, the market is not working. For families tangled up with truly dangerous financial products, the result can be wiped-out savings, lost homes, costlier car insurance, job rejections, troubled marriages, bleak retirements, and broken lives. Regulation can make the market for financial products more efficient and more dynamic while preventing substantial suffering for millions of Americans.
SETTING THE SNARE
Americans are drowning in debt. Forty percent of families worry whether they can make all their payments this month (Consumer Federation of America 2007). Nearly half of all credit card holders have missed payments in 2006 (the latest year for which data are available) (Konrad 2006), and an additional 2. …