This article explores the critical role of financial regulation in protecting consumers from exploitation and ensuring fair market practices, highlighting recent challenges faced by regulatory bodies.
Image: Ayanda Ndamane / Independent Newspapers.
It shocked me to learn that the Trump administration in the United States, with the assistance of Elon Musk and his Department of Government Efficiency, had dismembered and severely impeded the function of the Consumer Financial Protection Bureau (CFPB). This US government agency was established in 2011 under President Barack Obama in the aftermath of the global financial crisis of 2008. According to the US Treasury Department, the bureau is tasked with the responsibility to “promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services”.
On its website, the CFPB says its central mission “is to make markets for consumer financial products and services work for Americans – whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products”.
Wikipedia notes that many thousands of consumer complaints about financial services providers, including banks and credit card issuers, have been received and attended to by the CFPB.
The CFPB is not the only US agency acting against unfair practices by financial services providers; there is the longer-running and more established Federal Trade Commission (FTC), which has wide-ranging powers across business sectors that include enforcing antitrust laws. This has also been targeted by President Trump, who in March fired two of the FTC’s Democratic commissioners, although the legitimacy of those firings is now being questioned in court.
Which brings me to the topic of financial regulation generally.
Force for good
I strongly believe that regulation that levels the playing field, protects consumers from exploitation, and enables them to make better financial decisions is good for society as a whole, including the industry it regulates. Advocates of free markets would argue that companies in a competitive environment are self-regulating. I disagree. Competition is a powerful and vital force, but its nature is such that you will always have someone trying to make a quick buck by pushing the boundaries of what is normal or ethical. This is a big enough problem in a regulated environment; imagine how bad it would be in an unregulated one.
A supreme example of pushing the boundaries is, of course, in sport - specifically those sporting codes that primarily test physical prowess, such as athletics, swimming, weight-lifting, and cycling. Before these sports became commercialised, there was little monetary incentive for athletes to cheat. Perhaps a small amount of cheating went on behind the scenes, but public perception was that the winners represented the pinnacle of human strength, speed, and endurance, and the sports codes were popular because people believed the competition was real and the winners genuine.
That’s not the case anymore. When I watch an athlete win a race, there’s always the nagging question in the back of my mind: did he or she win on natural ability, or did performance-enhancing drugs contribute to the win? In which case, why am I wasting my time watching someone cheat?
It started with a couple of risk-takers pushing the boundaries. Eventually, just to remain competitive, everyone was doping, inventing more and more elaborate schemes to evade detection.
Moving targets
Regulators typically struggle to keep up with the novel ways people find to push the boundaries. I like to think that the financial regulators have had more success than the sports regulators.
In financial circles, there’s a recent push by those on the fringes to market private equity investments, which invest in private, rather than publicly listed, companies. I have nothing against seasoned, wealthy investors putting their money into private ventures – they know the risks. I do have a problem when private equity investments are marketed to consumers who are not aware of the risks.
There are currently at least two companies I know of that are marketing private equity products, including a living annuity, to the public, making out as if they are just regular products. Well, they are not regular. They carry a far higher risk for the investor than publicly listed equity. Pension funds, which have substantial assets and expertise behind them, are restricted by law to invest no more than 15% of their portfolio in private equity. And yet these fringe providers are asking consumers to trust them with their life savings.
Sometimes, regulators need to be proactive rather than merely reactive, and, before one of these firms goes belly up and investors lose their savings, they need to step in.
On the whole, though, I can say I am proud of what South Africa has achieved in taming the local financial services industry through regulation. There’s always the risk of regulation going too far and becoming too onerous on providers, which defeats the object, as it pushes up compliance costs and hence costs for consumers. So a balance must be achieved.
In America, deregulation will be terrible for the consumer and, if the Wild West returns, could even spark another crisis (if tariffs don’t do it first). Here’s hoping rational heads will prevail.
* Hesse is the former editor of Personal Finance.
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