Consumer Protection and Financial Innovation: A Few Basic Propositions

Abstract

The issue of financial innovation and consumer protection is mostly about access and suitability. Access refers to a situation in which affordable, mainstream financial products are available to all segments of the population across the range of income levels and demographic characteristics. Suitability addresses the appropriateness of the products for particular consumer groups. Innovative products will tend generally to be either positive for access to finance or neutral. But products that actually result in increased access to finance may nonetheless still raise suitability issues. Innovative products can be particularly difficult for retail consumers to understand and better financial education is needed to help address financial illiteracy. In addition, service providers should have appropriate internal controls to minimise the chances that consumers take on inappropriate exposures. Even the best disclosures, alone, may not be adequate, so to avoid situations in which retail investors become involved with unsuitable products, institutions should be “encouraged” to develop sufficient measures for client protection as part of their product development activities. Stricter penalties should be used when needed to address mis-selling, fraud or firm misconduct. JEL Classification: G01, G28, G38. Keywords: Financial innovation, consumer protection, financial regulation