Rethinking the Effectiveness of Consumer Protection Policies and Measures in the Financial Marketplace

Abstract

This paper identifies and challenges the frequent practice of financial institutions in designing and selling complex financial products to consumers who are not able to fully comprehend them, thus unable to make informed decisions before consumption. Tricking consumers to inadvertently purchase complex financial products, generally causes them to suffer financial losses, which on aggregate, has negative ripple effects in society. The paper discusses the reasons financial institutions are motivated to sell complex financial products, and notes how their success in this regard is nourished by the inadequacies of regulatory systems, among other things. The law of contract is identified as aiding to create a fertile ground through its freedom of contract and caveat emptor rules that make the abuses of financial consumers often unnoticed or appreciated by regulators, thus requiring the former to largely pull themselves up by their own bootstraps. The paper points out the weaknesses in the typical policy measures against exploitation and the mangled rules of disclosure which largely place the burden of comprehension of complex financial products on consumers notwithstanding the machinations of financial institutions toward diminishing comprehension: most financial information booklets are sprinkled heavily with financial terminologies and in complicated language whilst still satisfying the legal requirements of disclosure. The paper proposes a new form of disclosure rule based on the concepts of caveat venditor and contra proferentem, which respectively should require a financial institution’s presentation of information against self-interest, and the unambiguous presentation of equal number of disadvantages alongside the advantages of the products they offer to their consumers. The paper further argues that the principal role of regulators and courts in the circumstance, should be to supervise and assess the level of compliance, and consequently issue on annual basis, a rated performance certificate which financial institutions must post conspicuously on their websites and places of business, and also incorporate same in the information leaflets wherein they described their products, so that consumers can know at a glance those financial institutions that are, or not consumer friendly.