The complex structure offinancial products, generally, creates information asym- metry between providers and consumers and opens up opportunities for consumers to become targets of fraud or scams which can be financially devastating. As the array of products available to U.S. consumers continues to grow, so does the number of schemes to take advantage of these consumers.
The variability in products, markets, and distribution methods presents a chal- lenge for coordinating financial consumer protection activities. Thus, it is not surprising that laws and activities addressing financial consumer protection come from a wide range of sources including federal laws and regulations, state laws and regulations, industry members, industry associations, and community/non-profit groups. Among the broadest options for general improvement are improving informed choice through ex ante activities—disclosure, transparency and education
—as well as ex post opportunities for remedy and advocacy.
2.3 Ex-ante Protection
In the U.S., ex-ante protections to financial consumers include price controls, agent licensing requirements, disclosure requirements, educational resources, anti-competition laws, and efforts to promote literacy. These protections are derived primarily from a variety of federal and state regulations, but are enhanced through additional efforts by members of the financial services industry and consumer groups.
2.3.1 Product and Price Regulation
The Fair Credit Reporting Act (1970) provides important protections in three areas:
credit reports, consumer investigatory reports, and employment background checks.
It establishes the requirement that credit reporting agencies protect the confiden- tiality, accuracy, and relevance of individual credit information. It also establishes Fair Information Practices for personal information. These practices address data quality (access and correct), data security, limitations on use, data destruction, notice, user consent, and accountability. This rule was revised by the Fair and Accurate Credit Transactions Act of 2003.
The Fair Housing Act, enacted in 1968, addresses discrimination in mortgage lending. The provisions of the act address various industry practices, such as imposing different terms of conditions for groups based on race or national origin.
The Act is enforced by the Office of Fair Housing and Equal Opportunity, a division of U.S. Housing and Urban Development.
The Fair and Accurate Credit Transaction Act (FACTA) (2003) establishes the right for consumers to request and obtain a free credit report once per year. Also, it allows a consumer to place an alert on his or her credit history if identity theft is suspected. FACTA also established the Financial Literacy and Education Commission (FLEC), which is responsible for developing a national financial education strategy along with a national financial education web site, http://
mymoney.gov. The Commission is chaired by the Secretary of the Treasury and includes the heads of 19 additional federal agencies.
In 2011, the FLEC produced a report containing their strategy entitled,
“Promoting Financial Success in the United States: National Strategy for Financial Literacy.”6The report establishes goals to increasefinancial literacy and improve individualfinancial well-being. The goals included:
• Increase awareness of and access to effective financial education.
• Determine and integrate corefinancial competencies.
• Improvefinancial education infrastructure.
• Identify, enhance, and share effective practices.
The Fair Credit Reporting Medical Information Regulations Act (2005) addresses the use of medical information in determining a consumer’s eligibility, or continued eligibility, for credit. The Act allows creditors to obtain or use medical information for determining credit eligibility only where necessary for legitimate purposes.
2.3.2 Fiduciary Duties
Because consumers’ access to financial products often involves an intermediary, several laws addressfiduciary duties, i.e., they govern the behaviors of those who providefinancial advice, or make financial decisions for another person.
One of the earliest Acts to addressfiduciary duties was the Employee Retirement Income Security Act of 1974 (ERISA). This Act requires pension and health benefits plans to provide consumers with information about plan features and establishes the responsibility for managing and control of pension plan assets.
Further, the Act contains various measures to address grievances and provides for the right to sue for benefits and breaches offiduciary duty, including breaches of privacy. Three organizations share the responsibility for the interpretation and enforcement of ERISA measures: The Department of Labor, the Department of the Treasury, and the Pension Benefit Guaranty Corporation.
Securities and brokerage transactions are governed by several rules that encourage suitable investment advice. Together, FINRA Rule 2090,“Know Your Customer”, and FINRA Rule 2111,“Suitability”, require that brokerage firms and theirfinancial advisors use all relevant information on an investor’sfinancial sit- uation, including age, employment status, and risk tolerances, to determine the suitability of a particular investment.
2.3.3 Privacy Protections
Financial consumer protections also include rights to privacy, which are addressed in many federal regulations. For example, the Privacy Act of 1974 prohibits the disclosure of personally identifiable information maintained by government agen- cies and gives individuals increased rights of access to records maintained on themselves. More recently, the Health Insurance Portability and Accountability Act (HIPAA) established national standards for the privacy of health information.7The Act assures individual rights in health information and restricts how this informa- tion may be used or disclosed. Violation of the standards can result in civil and criminal penalties. The Act also established several notification rules that require vendors of personal health records (PHRs) and related entities, including business associates, to notify individuals when their individually identifiable health infor- mation is breached.
The Right to Financial Privacy Act (1978) requires financial institutions to protect information collected about individuals. Financial institutions must provide customers with privacy notices and give them the opportunity to control how personally identifiable information is shared, e.g., with outside companies. The Act does not provide consumers with the right to stop sharing among affiliated com- panies. The Act is enforced by four different agencies: The National Credit Union Administration, the Secretary of the Treasury, the Securities and Exchange Commission, and the Federal Trade Commission.
2.3.4 Antitrust Laws
Consolidation in the U.S. financial services industry raises some concerns with respect to its effect on competition and, consequently, consumer choice. In 2016, the American Antitrust Institute released a report addressing competition in the U.S.
banking andfinancial services sectors with the conclusion that “the economic and political consequences of increased consolidation and decreased competition are particularly grave.”8
Three federal laws have established U.S. consumers’ protection from antitrust activities: The Sherman Act (1890), the Clayton Act (1914), and Federal Trade Commission Act (1914). At the time the Sherman Act was enacted, interstate commerce was expanding. The goal of the Act was to prevent restraints of free competition, as such restraints may affect the cost and availability of products. The Clayton Act provided further clarification on pricing practices, such as pricefixing and price discrimination, and the Federal Trade Commission Act created the Federal Trade Commission (FTC), which is the agency charged with promoting competition in U.S. markets and protecting consumers from anticompetitive mergers. Along with the Department of Justice, the FTC is responsible for enforcing federal antitrust laws. Although the McCarran-Ferguson Act, enacted in 1945, confirmed the power of states to regulate the activities of insurers, insurers are not exempt from federal antitrust laws.
Consumer protection laws and antitrust laws may be in conflict. On the one hand, both types of laws seek to maximize consumer welfare; antitrust policy addresses market failures associated with the creation of market power, while consumer protections address the potential for information asymmetries and deception despite ample competition. However, where consumer protection laws presume consumers cannot make rational decisions (and hence, standardization is needed), antitrust law has generally held that consumer choices, which reflect consumers’true preferences, should be preserved.9
2.3.5 Good Faith and Fair Treatment
Bad faith refers to a variety of deceptive and improper practices in the insurance industry. To promote good faith and fair treatment, many states have enacted statutes that specifically prohibit certain bad faith practices on the part of insurers including, for example, failing to disclose policy limits, the use of abusive tactics to settle a claim, and unreasonable delay in resolving a claim. In other states, however, bad faith insurance practices are largely governed by court-made law. A majority of states have granted policyholders the right tofile private lawsuits against insurers alleging unfair claim settlement practices. Today, statutes addressing bad-faith and unfair insurance claims settlement practices exist, in some form, in every state.10 These laws are largely a product of model legislation drafted by the National Association of Insurance Commissioners (NAIC) in the early 1970s. Furthermore, all states have departments of insurance which, among their other duties, investigate bad faith and fraudulent practices committed by insurance companies.
2.3.6 Information Disclosure
Information disclosure is one of the most important areas in which regulators can protect consumers. In thefinancial industry, disclosure of information has important consequences in many places. Therefore, most financial services firms face requirements to disclose certain information to consumers so that they are able to make informedfinancial decisions.
Inadequate or incomplete information can lead consumers to select unsuitable products. Regulation DD, established by the Federal Reserve in 1993, was enacted to implement the Truth in Savings Act of 1991. The regulation requires banks to disclose the following information to their customers upon opening up an account:
interest rates, credit and compounding policies, service fees, method of computing the balance, and minimum balance requirements. Additional disclosures are required if the terms of the account are changed.11 Disclosures themselves must meet certain requirements, such as being clear and conspicuous, in writing, and identifiable for different accounts. Research suggests that the cost of implementing the Act was not trivial, as it required all banks to change their practices, not just the banks that were making use of a particular practice.12
In the insurance industry, disclosures are addressed through states’Unfair Trade Practices Acts, generally found in state insurance statutes.13 In the life insurance context, these state regulations have the avowed purpose of improving consumers’ ability to select the most appropriate insurance form of life insurance to meet their needs. More generally, disclosures that are required include policy summaries which clearly indicate assumptions and guaranteed values, where relevant.
Disclosure of information for securities prices serves to make firms more effi- cient and productive.14 Disclosure of securities prices has important implications for investors infinancial markets. The potential for managers to selectively disclose information to particular investors and analysts can have severe consequences for the investors that do not have the same information. This selective disclosure could make current and/or potential investors unwilling to trade infinancial markets. In light of such concerns, the U.S. Congress enacted Regulation Fair Disclosure (Reg FD) in 2000. Reg FD states that any material information disclosed by managers must be publicly available and accessible to all investors at the same. The regulation is enforced by the Securities and Exchange Commission (SEC), which specifies that such material information includes any information“that a reasonable shareholder would consider…important in making an investment decision.”
2.3.7 Financial Literacy, Insurance, and Retirement Savings
Evidence suggests that the U.S. Population is not adequately protected against a variety of risks. The take-up rate on insurance for flood risks,15 for example, is surprising low, as is the take-up for annuities.16Studies indicate that a large portion of the population is not adequately preparing for retirement. This can be seen in the number of people remaining or returning to the workforce in their 70 s (graphic).
Many of the organizations mentioned above provide educational resources to financial consumers in an effort to promote better financial decision making. As noted above, FLEC has a National Strategy for Financial Literacy. These types of activities extend the mission of protecting financial consumers by increasing awareness of potential scams and fraudulent activity.
Consumers seeking financial information via the internet will encounter an overwhelming number of organizations willing to provide advice. Those providing investment advice include, for example, Investopedia, The Street, Morningstar, NerdWallet, Money Crashers, and Bank Rate. Tips for getting out of debt can be found on a variety of banking and credit card websites.
Consumer Reports, established over 80 years ago, is a nonprofit organization that promotes consumer safety and economic awareness through a range of edu- cational resources.17Their mission is to provide evidence-based protect testing and ratings, backed by research and investigative journalism. Their reviews offinancial products include car and home insurance, banks and credit unions, credit cards, prepaid cards, rewards cards, brokerage services.
Take Charge America is one of the largest nonprofit credit counseling and debt management agencies in the U.S. It is an organization that works with individuals
and families facing financial challenges. The resources provided include tips for managing credit card debt, paying off student loans, and avoiding bankruptcy.18
2.4 Ex-post Protection
One of thefirst federal Acts to address financial consumers is the Federal Trade Commission Act (1914). This act established the bipartisan Federal Trade Commission (FTC), designed to promote a competitive marketplace for both consumers and businesses. It develops policy and research tools through hearings and conferences, and in collaboration with law enforcement agencies across the U.S. The FTC protects consumers in a number of ways. First, it monitors mar- ketplace practices and intervenes when such practices are deemed unfair, deceptive or fraudulent. They collect complaints on a wide range of issues, including com- plaints involvingfinancial practices, deceptive advertising, and identity theft. The information is shared with law enforcement agencies for further investigation.
The FTC can bring lawsuits against companies and people that violate the law.
Since it was established, the FTC’s role in consumer protection continues to expand, as noted below.
The Fair Debt Collection Practices Act (Revised 2006) provides consumers with a right to dispute the accuracy of debt information. It creates guidelines for orga- nizations conducting debt collections and establishes penalties for violations.
The Federal Trade Commission Identify Theft Rule, aka the“Red Flags Rule” was enacted in 2007 requires certainfinancial institutions and creditors to imple- ment a written identity theft program that identifies and detects the relevant warning signs—or“redflags”—of identity theft in their day-to-day operations. The program should explain steps that are taken to prevent the crime and mitigate any potential damage. The rule is enforced by the FTC along with several other agencies.
U.S. consumers can file complaints against financial services organizations or financial services agents with a variety of organizations. Most state financial ser- vices departments have online forms for submitting complains against financial institutions. Also, consumers have a variety of options for suingfinancial services firms, e.g., for bad faith. A ruling by the U.S. Supreme Court in the case ofMerrill Lynch, Pierce Fenner & Smith,et al., v. Manning,et al., affirmed that investors may use state courts to bring grievances againstfinancial servicesfirms.
2.4.1 State Fraud Bureaus
State insurance fraud bureaus are state agencies that provide various services including detection and investigation of insurance scams. Most bureaus are located within the state department of insurance, department offinancial services, or the office of the state attorney. They generally deal with all types of insurance fraud, and operate online or phone-in hotlines by which consumers can report suspected
scams. A list of state insurance fraud bureaus is available at http://www.
insurancefraud.org/fraud-bureaus-directory.htm.
The Coalition Against Insurance Fraud is an alliance of insurance organizations, government agencies, and consumers that promotes enactment of anti-fraud laws and regulations. It was founded in 1993 following a dramatic increase in automobile scams in New Jersey. The original 17 members has grown over time to over 90 members. It provides education services and coordinates and disseminates research on specific areas of fraud. Some of the areas addressed include medical identity theft schemes and auto repair scams.http://www.insurancefraud.org/about-us.htm
2.4.2 The Dodd-Frank Act
In the years leading up to the 2008financial collapse, there were reports of a variety of practices that were harmful to consumers. One such practice was predatory mortgage lending, whereby consumers were steered into inappropriate loan situa- tions. Research suggests that both fraud and confusion played a role in this activity, which resulted in a significant increase in foreclosures.19 Other practices include tricks to entice individuals to accept new credit cards and unfair overdraft policies used by banks.
The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010. This major Act, enacted in the aftermath of thefinancial crisis of 2008–2009, made changes in the U.S.financial regulatory environment that affect almost every part of the USfinancial services industry. Title IX of the Act, entitled
“Investor Protections and Improvements to the Regulation of Securities,”includes measures that revise the powers and structure of the Securities and Exchange Commission and credit rating organizations. It also establishes new rules addressing relationships between customers and broker-dealers or investment advisers. While Title IX contains ten subtitles, the provisions in subtitle A specifically address financial consumer protections. These provisions include:
• The creation of the Office of the Investor Advocate, an Investor Advisory Committee, and an ombudsman appointed by the Office of the Investor Advocate.20 These organizations are designed to prevent regulatory cap- ture within the SEC and increase the influence of investors.
• Authority for the SEC to issue “point-of-sale disclosure (POS)” rules. POS disclosure items include key product features, information on costs and risks, and conflicts of interest.
• Authority for the SEC to establish standards and impose regulations that require
“fiduciary duty”by broker-dealers to their customers. As of the end of 2016, the SEC has still not proposed a uniformfiduciary rule. One proposal is a rule that would allow non-governmental, or third-party, examinations of investment advisers. This rule would increase the number of adviser exams that are conducted annually. Currently, only about 10% of registered advisers are examined each year.
The remainder of Title IX includes measures that address a range of regulatory and monitoring issues including the regulation of credit rating agencies and the establishment of a Public Company Accounting Oversight Board with the authority to establish oversight of certified public accounting firms. Title X creates the Consumer Financial Protection Bureau (CFPB), which provides education and research to improve consumers’ interactions with financial products. Recent research studies by the CFPB address the benefits offinancial coaching and fees paid by online payday loan borrowers. The CFPB maintains a website, YouTube, and Twitter accounts by which consumers may post comments and suggestions.
Although the Bureau has authority over retirement and savings plans, it has not taken an active role in helping consumers managing savings.
2.4.3 Better Business Bureaus
Better Business Bureaus (BBB) are accrediting agencies that set standards for ethical business behavior and then monitors compliance with these standards over time. In 2016, almost 400,000 accredited businesses meet and commit to their standards. Some of the areas in which they set standards is in advertising and the use of donations by charitable organizations. Services are offered online and in person at locations across the country. The Council of Better Business Bureaus (CBBB) is the network hub for the local locations across the US and Canada.
A BBB does not have any regulatory authority. It collects complaints and information on scams through an online system and provides this information to local, state and federal law enforcement agencies. The Bureau asserts that they are
“often thefirst organization to know about a developing scam and alert authorities and the public. When a scam develops in one part of the country, the news travels quickly between BBBs in the U.S. and Canada that in turn alert the public in their communities.”