The President has proclaimed this week to be National Consumer Protection Week. A number of government agencies and non-profits are engaging in “a coordinated campaign that encourages consumers nationwide to take full advantage of their consumer rights and make better-informed decisions.” It is hard to argue with a campaign to encourage consumers to seek the information they need to make decisions, but many consumer protection efforts hurt the consumers they are intended to help.
Poorly designed consumer protection efforts can make it difficult for consumers to get products and services that they would otherwise like to have. Some regulators believe that, even if consumers do get information, they might not make the right decision for themselves. As a consequence, sometimes regulators seek to ban products outright. For example, regulators have argued that certain types of mortgages and credit cards should not be allowed to be sold at all. Sometimes regulators make the providers (especially small providers) of those products jump through so many regulatory hoops that providers simply stop offering products.
Wealthy consumers usually have a vast array of choices, so they are not much affected by the government’s decision to make certain products off-limits. Regulatory prohibitions, however, can really harm middle-class and lower income consumers, who may find themselves without the products they need. Often the regulators who are seeking to help these consumers do not understand the difficult circumstances these consumers face. If the cost of new regulations is passed on to consumers through higher prices, these consumers may not be able to buy the products. If a small bank in a consumer’s neighborhood stops offering a service because of the cost of new regulations, the consumer may not have any means of transportation to get to a bank in another neighborhood that still offers the service.
An example of the costs to consumers is unfolding in the first Dodd-Frank regulation adopted by the Consumer Financial Protection Bureau. The regulation imposes new requirements on companies that transmit money from people in this country to family and friends abroad. The far-reaching requirements related to disclosure, error resolution and cancellation rights, are expected to be extremely costly. According to the CFPB, in the first year entities will spend 7.68 million hours to comply with the paperwork requirements of the rule and 4.25 million hours every year after that. These costs will be passed on to consumers. The CFPB even acknowledged that small banks and credit unions might “increase their prices or stop providing consumer international wire or ACH transfers altogether.”
I hope that regulators will take some time during National Consumer Protection Week to reflect on the possibility that purportedly pro-consumer regulatory initiatives may prevent consumers from getting products they desperately need.