The protection of financial consumers is now considered essential for a sound financial system. Its importance grew in the aftermath of the global financial crisis, but it is still a challenge to supervisors.
Financial regulation originally focused on the reduction of information asymmetries by imposing disclosure and mandatory formalities in order to enhance the comparability of products and services. However, the market turmoil of 2008 together with several studies in behavioral finance proved that this was not enough: disclosure and mandatory formalities do not ensure that consumers take a decision in their best interest. Hence, disclosure requirements have been complemented with business conduct requirements aimed at promoting fairness by financial intermediaries.
Financial regulation in Europe now requires financial service providers to consider the interest of financial consumers even before their products are offered on the market. Product governance requirements impose that providers take explicitly into account the interest of consumers when designing new products, and test them to assess if they will really serve the interests and the needs of the consumers.
This evolution poses a number of challenges to supervisors dealing with financial intermediaries’ market conduct. For instance, there are still differences in the range of tools and enforcement powers that conduct supervision authorities rely on in different countries.
As in the case of prudential supervision, public enforcement typically relies on on-site and off-site monitoring powers; but challenges for conduct supervision come from the nature of the analyses required. While prudential supervision can typically rely on a quantitative approach, the protection of financial consumers may require a judgment-based analysis of the quality of customer relation arrangements. Sanctions are of course an essential deterrence tool, and (again, differently from prudential supervision) may be complemented by the power to impose the reimbursement of sums unduly charged (which directly favor damaged consumers, differently from sanctions).
New technologies in the financial system challenge regulators and supervisors, they open up new streams of products and services in a fast-changing market.
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