Responsible Finance Forum

Consumer Protection Regulation in Low-Access Environments: Opportunities to Promote Responsible Finance

Laura Brix and Katharine McKee
01 February 2010
Source:  Consultative Group to Assist the Poor (CGAP)

Responsible finance is much in the news these days, as the fallout from irresponsible financial practices and products in the United States and other developed markets continues to affect global finance. Regulatory failure clearly played a role in the meltdown of the financial system. One silver lining of the global financial crisis is that more attention is being paid to financial consumer protection. Debates in the legislatures and central banks of countries with sophisticated financial markets are highlighting the link between protecting financial consumers and stable, efficient markets. Restoring consumer confidence in the financial system is a key priority.

Are consumer protection problems and solutions currently under consideration relevant for developing country policy makers, or are the markets, products, providers, and consumers too different? This Focus Note seeks to answer this question, drawing on consumer protection diagnostics of various types carried out by CGAP in more than a dozen countries, widespread consultations with regulators, review of research and experience in developing and developed countries, and Financial Inclusion 2009 cross-country survey findings. It cites significant examples, as well as evidence of their effectiveness (where data are available).

The challenge for policy makers is translating these broad principles into laws, regulations, and enforcement measures that are effective in very different settings. Priorities and practical implementation will vary widely according to the country’s stage of financial sector development, financial inclusion goals, regulatory capacity, consumers’ experience using formal finance, and consumer culture. Regardless of timing and phasing, focus on the country’s distinct risks and context is key. Wholesale adoption of laws and regulations from elsewhere is rarely appropriate due to differing cultural, legal, and economic contexts. The capacity of the regulator in question to implement and supervise is also critical. Many countries with large underserved markets still struggle with adequate prudential oversight of financial institutions. When regulatory capacity is limited, will a focus on consumer protection divert resources from other essential functions?