Sunday 12 January 2014

Conduct Risk Regulation: the Global Dimension

I wrote a post not so long ago about conduct risk in the UK (here).  In the course of producing that work, I discovered an emerging global dimension to conduct risk and I have been looking into it.  There seems to be three strands to this:

1.  Work on financial consumer protection focusing on credit and coordination with other international bodies by the Financial Stability Board (here).

2.  Principles for financial consumer protection led by the OECD.    The OECD has developed 10 principles of consumer protection (here).  I have summarised them below.  They summarise neatly the extent of the challenge.  The OECD continues its work.  It has issued a draft paper (here) setting out more detail on some of the principles.  

3. Work on financial education through International Network on Financial Education (INFE) coordinated by the OECD.   There is an interesting set of principles developed by the OECD (here) and a web-site listing financial literacy programmes and related research (here). 

I find this interesting for a number of reasons. 

1.  If you believe that regulation can be improved by pooling knowledge and expertise, then there is something valuable here.  Given the domestic nature of retail financial markets, this is going to be an interesting experiment of supervisory design where the challenge will be to articulate workable approaches that can be tailored to national conditions rather than prescriptive solutions.

2.  While financial consumer protection is a good case of a market failure, in the genuine economic sense, not every policy intervention would necessarily pass a cost-benefit test.  If there was scope for an 11th principle it would be assessing the costs and benefits of policy initiatives.  Interestingly, the principles on national strategies for financial education include impact assessment. 

3.  The explicit recognition in the OECD principles that effective competition in the relevant markets can deliver appropriate outcomes for consumers. 

4.  While the above points together with the underlying market failure add up to a reasonable case for this activity, it is interesting that policy-makers interest on this issue stems from the financial crisis – a feature of G20 summits since 2010.   

The G20 interest together with the OECD endorsement of the principles should give these initiatives momentum.  It would be interesting to see what are the national impacts of these initiatives.   

OECD 10 principles for financial consumer protection

1. Financial consumer protection should be an integral part of the legal, regulatory and supervisory framework. 
2.  There should be oversight bodies explicitly responsible for financial consumer protection with the necessary authority to fulfil their mandates. 
3.  All financial consumers should be treated equitably, honestly and fairly at all stages of their relationship with financial service providers. 
4.  Consumers should be provided with key information about the fundamental benefits, risks and terms of the product, including conflicts of interest where an agent is also involved in the sale.  
5. Financial education and awareness should be promoted by all relevant stakeholders and clear information on consumer protection should be accessible. 
6.  Financial service providers and their agents should have an objective to work in the best interest of the consumer and be responsible for upholding consumer protection. 
7.  Financial service providers should put in place mechanisms to protect financial consumers’ assets from fraud, misappropriation and other misuse.
8.  Personal information should be protection through appropriate control mechanisms. 
9.  Financial consumers should have access to complaints and redress mechanisms that are affordable, independent, fair, accountable, timely and efficient. 
10. Competitive markets should be promoted to provide consumers with greater choice, create competitive pressure on providers to offer competitive products, enhance innovation and maintain service quality.

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