The Promises of Evidence-based Consumer Protection Polices

The expansion in credit and other financial products worldwide holds great promise to allow families to invest durable goods or human capital, or simply smooth consumption over time. But expanding access to loans, insurance and savings/investment products creates new concerns about how well consumers can navigate this new frontier. Policymakers confront conflicting goals of regulating the price, quality or quantity of financial services while still encouraging innovation and expanding access. Serious policy questions need objective, rigorous analysis.

In June CGAP and ideas42 created a unique forum for a small group of researchers and international consumer financial regulation policymakers to engage in a dialogue of how consumer protection policies can be better grounded in empirical research on consumer behavior.

How can evidence play a more prominent role in consumer protection policy? Clearly policy makers value research on policies that can make consumers better off. But financial markets are moving fast.

Researchers may take years to perform studies and publish analysis. Policy making needs research that can be applied rapidly based on extrapolation from smaller studies. Briefs, webinars and discussion panels are all strategies to facilitate academics to share evidence-based insights. Researchers are not always comfortable with such an approach--for good reasons such as the potential for making an error--but not doing so limits the value of the researcher community for decision makers.

But, policymakers also need to become more comfortable with engaging in objective policy evaluations, including sharing data and proving financial support for studies. Effective consumer protection requires critical reflection, and regulators need to be open to sharing administrative processes and data, including randomized experiments where the causal effects of policies can be directly estimated. What are few examples of consumer policy issues which policy makers and researchers need to collaborate on?

Optimal information

Anyone who has ever faced pages of fine print knows the limits of providing prospective consumers standardized information through mandated disclosures. Yet, data on quality, consumer experiences, risks or prices often are collected by public agencies. Making information public and accessible can put pressure on firms to compete on price and non-price attributes as well as encourage consumers to comparison shop. We need to better understand what data is most important, and how best to communicate that information.

Regulating advice

We need to understand how people are mislead even in the face of negative information. We also need to understand how counselors and related financial 'experts' aid and impede decisions.

Getting attention

On a number of fronts the main problem is that consumers delay or avoid important financial decisions. Developing real time, interactive tools to engage consumers on decisions will be useful. For example, text messages show promise for boosting savings rates. More studies are needed to test the strength and tenacity of reminders across financial behaviors, as well as how to translate these findings into policy applications. Collaboration between regulatory agencies and researchers benefit both sides. Researchers learn about important policy issues, gain access to data and better understand administrative procedures. They also benefit from engaging in work that is valued and has influence in society.

Regulators can develop or refine policy approaches as the financial market evolves using research evidence. Of course, the ultimate beneficiary of well designed financial policies are consumers. Backed by evidence, regulations can effectively balance access to financial products while protecting consumer welfare.