What to Protect?

FAI Director Sendhil Mullainathan appeared as a witness in the recent U.S. Senate Banking Committee meeting “Creating a Consumer Financial Protection Agency: A Cornerstone of America’s New Economic Foundation.”  You can watch the hearing here (Mullainathan’s testimony starts at 151.45 mins).

In his testimony, Mullainathan describes a feature of the regulation called “ring fencing.”  The idea described a two-part approach to consumer approach – safe, standard products should be lightly regulated, while exotic products would be more heavily regulated.  Exotic products would still be available to consumers; they would just have more safeguards, and consumers who wish to use the products would have to make a conscious choice to do so. 

In microfinance, consumer protection initiatives are also underway.   CGAP and ACCION’s Center for Financial Inclusion have launched the Campaign for Client Protection which aims to develop and implement consumer protection standards in microfinance institutions globally.  The six campaign principles are: avoidance of over-indebtedness, transparent pricing, appropriate collections practices, ethical staff behavior, mechanisms for redress of grievances, and privacy of client data.  

The microfinance efforts all focus on products that seem “plain vanilla” (at least relative to some of the contraptions sold to unsuspecting mortgage cusomers in the U.S.).  But, the international microfinance experience has taught us that even standard products can benefit from safeguards.