Consumer Financial Products Research Articles

The Creation of the CFPB (Consumer Financial Protection Bureau) in 2012: Create a Sound Economic Foundation to Grow, Jobs and Protection of Consumers in the USA

Creates a single point of accountability in The Federal Government for consumer financial protection. A. General Discussion The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) was established under “Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). To create a single point of accountability in the federal government for consumer financial protection,” “the Dodd-Frank Act consolidated many of the consumer financial protection authorities previously shared by seven federal agencies into the CFPB and provided the Bureau with additional authorities to: Conduct rulemaking, supervision and enforcement with respect to the Federal consumer financial laws; Handle consumer complaints and inquiries; Promote financial education; Research consumer behavior; and, Monitor financial markets for risks to consumers.” “The Bureau performs its work through six Divisions, described below: Supervision, Enforcement, and Fair Lending Ensures compliance with” Federal consumer financial laws by supervising market participants and bringing enforcement actions when appropriate.Research, Markets, and Regulations: Responsible for understanding consumer financial markets and consumer behavior, evaluating whether there is a need for regulation, and determining the costs and benefits of potential or existing regulations.Consumer Education and Engagement: Provides, through a variety of initiatives and methods, information to consumers that will allow them to make decisions that are best for them. Consumer education is a central mission of the Bureau.” “The Bureau is developing targeted outreach to groups that face particular challenges, as required by the Dodd-Frank Act.”Legal Division: Responsible for the Bureau’s compliance with all applicable laws and provides advice to the Director and the Bureau’s divisions.External Affairs manages the Bureau’s relationships with external stakeholders and ensures that the Bureau maintains robust dialogue with interested stakeholders to promote understanding, transparency, and accountability.Operations Builds and sustains the CFPB’s operational infrastructure to support the entire organization. The division also includes the Office of Consumer Response, which handles consumer complaints and inquiries related to consumer financial products and services. The CFPB is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.

Regulating Consumer Financial Products: Evidence from Credit Cards

We analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act. We use a panel data set covering 160 million credit card accounts and a difference-in-differences research design that compares changes in outcomes over time for consumer credit cards, which were subject to the regulations, to changes for small business credit cards, which the law did not cover. We estimate that regulatory limits on credit card fees reduced overall borrowing costs by an annualized 1.6% of average daily balances, with a decline of more than 5.3% for consumers with FICO scores below 660. We find no evidence of an offsetting increase in interest charges or a reduction in the volume of credit. Taken together, we estimate that the CARD Act saved consumers $11.9 billion per year. We also analyze a nudge that disclosed the interest savings from paying off balances in 36 months rather than making minimum payments. We detect a small increase in the share of accounts making the 36-month payment value but no evidence of a change in overall payments.

Financial literacy education and behaviour unhinged: combating bias and poor product design

AbstractThe growth of products available in the consumer financial market has provided more choice and formal control over household financial decisions than ever before. Financial literacy education programs are generally assumed to improve consumer behaviour in relation to financial products and services. However, there is scant evidence that demonstrates the causal link between education, literacy and behaviour. Through the use of a sample study, we show that the actions of individuals who are financially literate do not necessarily mean they will demonstrate good financial behaviour. We propose that in order to improve the financial behaviour of consumers, two critical areas need to be addressed. Firstly, the objectives of financial literacy programs should be not only to educate consumers about financial markets and products but highlight to individuals the psychological biases and limitations that they as humans cannot easily avoid. Secondly, the regulation of financial products sold to consumers needs alteration to meet the aim of protecting retail consumers from complex financial products that are confusing, ambiguous and inappropriate. We propose regulation and redesign of product information offerings using techniques employed in ecological interface design models to derive a suitability test for consumer financial products.

The Effects of Regulating Penalty Fees for Consumer Financial Products

We examine the welfare effects of regulation in a model where firms can shroud add-on costs, such as penalty fees for consumer financial products. In isolation, imposing price controls or disclosure mandates on such fees can increase or decrease welfare, even when these regulations have no direct costs. There are, however, strong complementarities between price controls and disclosure mandates: conditional on disclosure being mandated, price controls always (weakly) increase welfare, and conditional on prices being sufficiently constrained, disclosure mandates always (weakly) increase welfare.

Everyday discourses of stock market investing: Searching for investor power and responsibility

The latest financial crisis has aroused public discussion about the moral aspects of financial speculation and the rights and responsibilities of different market actors, including private consumers of financial products. Shifting the focus away from the level of individual morals and choices, this paper sets out to trace the discursive “conditions of possibility” for reflective and responsible financial consumption. Through a critical discourse analysis of media and marketing texts, the paper identifies and examines four conventionalized discourses of stock market investing: market mechanics, market psychology, market participation, and market expertise. The paper shows how each of these widely normalized discourses articulates investing as an individual enterprise of wealth management, devoid of broader social or political relevance. It is argued that the prevalence of such representations is likely to discourage social awareness with regard to financial consumption and to impede the establishment of fair and sustainable market practices.

Disclosure – An Unappreciated Tool in the CFPB’s Arsenal

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) establishes the Consumer Financial Protection Bureau (“the Bureau”). Dodd-Frank defines a broad mission for the Bureau. According to the legislation, the Bureau will “implement and, where applicable, enforce federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.” The Bureau has produced considerable anxiety in the consumer finance industry. Most of the anxiety has focused on two issues – who will head the Bureau and what will the Bureau do with the newly created power to ban “abusive” products. This article suggests that the financial services industry should be focused on a third question – what will the Bureau do with its power to regulate the disclosure of consumer financial services.

Disclosure - An Unappreciated Tool in the CFPB's Arsenal

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) establishes the Consumer Financial Protection Bureau (“the Bureau”). Dodd-Frank defines a broad mission for the Bureau. According to the legislation, the Bureau will “implement and, where applicable, enforce federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.” The Bureau has produced considerable anxiety in the consumer finance industry. Most of the anxiety has focused on two issues – who will head the Bureau and what will the Bureau do with the newly created power to ban “abusive” products. This article suggests that the financial services industry should be focused on a third question – what will the Bureau do with its power to regulate the disclosure of consumer financial services.

Why Now is Not the Time to Revamp Consumer Financial Protection

This note is based on remarks I gave at a conference held at the New York Federal Reserve Bank on January 6, 2010 concerning proposals to reform consumer financial products protection in the United States. It observes that the U.S. Department of the Treasury’s proposal for a radical increase in the scope and stringency of consumer financial product regulation was a mistake. Treasury's proposal was based on the false premise that failed consumer financial regulation was a significant cause of the financial crisis. The resulting focus on consumer protection has distracted Treasury and Congress from pursuing serious reforms of prudential regulation and dealing with other problems that are widely acknowledged to have contributed to the crisis. The proposed consumer protection legislation is also badly timed since the regulations would make lending more costly and difficult for financial institutions during a period of time when the Administration should be making it easier for consumers and small businesses to borrow to reignite the economy. While consumer financial regulation is important and could no doubt be improved, the advocates for a new agency with sweeping powers have presented essentially no evidence that the benefits of this agency would outweigh its costs.

Social Status and Intertemporal Preferences

The field of household finance has established a correlation between savings behavior and education, income, and race. This is partly explained by a high discount rate ultimately leading to low social status. This paper establishes causation in the opposite direction, with a relatively low social status position leading to a relatively high discount rate. The method used is experimental, with 154 subjects interacting in high- or low-status assignments. The subsequent change in intertemporal preference is significantly determined by the status assignment. The effect is strongest among the subjects who initially have higher discount rates and does not depend on the sex of the subject. This result implies low status consumers have higher discount rates and make worse financial choices because of their low social status, a finding that must be addressed in the regulation of consumer financial products.

Beep beep beep beep, that'll be the bank then — Driving sales through mobile marketing

This case study describes how first direct is executing a mobile marketing strategy without increasing channel adversity to marketing messages. Their experience counters the myth that consumers of financial products and services do not want to be engaged in marketing conversations via their mobile phone. This paper outlines first direct's approach and provides insight and illustration with the use of case study materials.

The Information Content of Mutual Fund Print Advertising

The mutual fund industry has experienced tremendous growth in recent years. During this time period mutual funds have become somewhat of a commodity with many funds using advertising to attract investors. The current study uses content analysis to determine the informational content of fund advertising. The results indicate that while the average number of informational cues increased during the time period 1979 to 1989, there was no significant increase in the information content of mutual fund advertising between 1989 and 1999. Relatively few funds include information such as loads, 12b‐1 fees, and expense ratios in their advertisements, and fund ads rarely discuss risk.

Reading Financial Services: Texts, Consumers, and Financial Literacy

The authors focus upon the changing nature of production and consumption within the retail financial services industry. The perennial problem which faces all producers of financial services is information asymmetry; that is, providers and consumers of financial products have unequal amounts of information about whether or not customers have the wherewithal to make them ‘capable’ purchasers. Thus, the problem of information asymmetry is usually manifested in a priori decisionmaking about the suitability of customers. This problem has traditionally been overcome by forging interpersonal relationships of trust with consumers through copresence. Increasingly, however, trust in consumers is being forged through technologically mediated means of information collection functioning ‘at a distance’ so that financial services producers are coming to ‘read’ consumers as ‘texts’, through the medium of databases. These developments have had a number of effects, such as increased competition in retail financial markets, while branch networks, which acted as durable barriers to entry to the market, have become less important as sites of market intelligence and knowledge. Consumers have also been forced to forge new relations of trust with retail financial service providers. This is increasingly being achieved through the use of various media and through identification with brands. Such developments have served to create social and spatial divisions of financial inclusion and exclusion, as producers use at-a-distance information to discriminate between ‘good’ and ‘bad’ customers. Those ‘inside’ the financial system are able to use their financial knowledge to take advantage of increased levels of competition between financial service providers. However, those excluded from the financial system are doubly handicapped as they live in both a financial and an information shadow. Such individuals are likely to pay an increasingly heavy price for their exclusion, particularly given the collapse of universal welfare provision and the allied growth of private welfare-related financial products. In recognition of this, in the final part of the paper we consider ways of countering problems of financial exclusion and low levels of financial literacy.

Success Factors for New Consumer Financial Services

A study of the characteristics of successful new consumer financial products is described. The first stage of the investigation involved the identification of financial product attributes possibly associated with success. A total of 43 were found. Information was then collected on these attributes for 77 new financial products and was simplified by grouping into nine distinct factors. The article describes all nine factors in detail with illustrations. Four of the factors are particularly associated with success. They are: “overall quality” (the product, the delivery system, after‐sales service, the organisation′s reputation for quality); having a differentiated product (being first, being innovative); product fit and internal marketing (the new product complementing existing products and receiving the support of staff); and use of technology.