Yesterday saw an interesting day-long event that brought together the paired topics of financial literacy and consumer protection. (Many of the day's presentations are available here.) Although I only managed to attend the first couple of sessions, I caught a lot of interesting material.
After welcoming remarks, Martin Gruenberg, the Vice Chairman of the US Federal Deposit Insurance Corporation, started off with the keynote address. Gruenberg gave a play-by-play of the subprime meltdown in the US; I think it was good to start off on a note of humility. If the US has managed to muck it up this badly, then it might be good to approach the issue of consumer protection with a bit of caution.
The questions that arose repeatedly were how to get the balance right on two issues:
- What level of consumer protection is appropriate?
- How can financial literacy complement consumer protection?
Fernando Montes-Negret, Sector Director for Europe and Central Asia, laid out the theoretical case for consumer protection. Financial markets suffer from information asymmetries (does that guy offering you a loan know something about it you don't?) and adverse selection (isn't it the guy who's willing to take big risks that's going to try to take out a loan?), among other problems. Consumer protection can help alleviate some of this. Montes-Negret and others cautioned, however, against an excessive paternalism in these matters. In countries with relatively efficient markets, it's usually trust that greases the wheels of the economy, not endless litigation.
The complement to consumer protection, as many speakers pointed out in one way or another, is financial literacy. My sense is that we don't really know a whole lot about what makes for effective financial literacy. But there was one program that really stood out. Fernando Arrunategui, a manager at Peru's Superintendency of Banking, Insurance, and Private Pension Funds, discussed a very interesting information campaign carried out by the Superintendency. They started publishing easily comparable information about various types of consumer credit, and this chart gives a pretty clear message about the results of the campaign:
While this evidence might not meet the standards of a randomized evaluation, I still think it's pretty convincing that this kind of publicity campaign can work.
The last presentation I caught also definitely deserves a mention. Katharine McKee of CGAP discussed the particular difficulties of consumer protection at the bottom of the pyramid. It's here where a real tension arises between extending access to finance and ensuring consumer protection. Branchless banking in particular presents real challenges. But a combination of light-touch regulation and non-regulatory tools might be able to do the trick. You can check out McKee's presentation here.
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