Financial Consumer Protection in the Era of Digital Transformation: A Critical Survey of Literature and Policy Practices

Abstract

This study aims to shed light on how to foster a welfare-enhancing policy regime for financial consumer protection (FCP), mainly through a literature and institutional survey on three pillars of FCP policyfinancial education, ex ante (or before point of sale) FCP measures, and ex post policy instruments. To that end, we first conceptualize the typical behavioral patterns in the demand-and supply-side of the financial markets, to be tamed through an FCP policy regime, and also attempt to reflect the ramifications of the on-going global trend of digital transformation. As to the first pillar, most of the literature claims that no consensus exists as to the goal of financial education (FE), one that is clear, specific, and measurable enough to guide empirical endeavor to gauge its effectiveness. On this issue, we suggest three dimensions of financial capability as possible targets of measuring the effectiveness of FE -knowledge dimension, choice and decision dimension, and outcome dimension, and discuss a possible testing strategy. Another issue stressed is that, given the inherent complexities in most financial products, the second letter "E," i.e., pedagogy and timing, should be given a higher weight than the first one "F," i.e., contents, in designing a FE strategy. In the supply-side, three sets of policy instruments are discussed as the key FCP elements: that is, the self-regulation mechanisms such as code of conduct, and training and certification programs for business ethics; the behavioral principles along with rules and regulations to ensure fair and ethical consumer treatment (FECT); and, internal governance structure to align FECT with incentives of employees of financial institutions. In addition, dispute resolution mechanism along with the legal responsibility of service providers if and when FECT is violated are also discussed. Using the key findings, we develop a template, or a checklist, by interacting the key behavioral patterns to be tamed with the FCP policy instruments, and suggest a set of indicators based on the matrix developed to be used for international comparison.

Proposal and validation of a financial protection perception scale

“…Researchers can apply the FPPS in surveys or longitudinal studies to assess the perception of security of financial services in general or for a specific group, and also in association with other measures, such as antecedents of the perception of financial citizenship or financial inclusion. Thus, the existence of a simple and specific measure such as the FPPS has the potential to expand studies on this topic, which, until now, have been predominantly related to legal and regulatory aspects (Cho & Park, 2021; Kriese et al, 2019a), with little or no focus on citizens' perceptions.…”

“…Despite the advances in the definition of financial protection, the literature is still incipient when it comes to the proposal of a measure to assess the level of financial protection provided by a country's financial system or to identify the perception of financial protection by its users. Former studies focusing on financial services consumer protection tend to focus on documenting regulatory practices, evaluating the effectiveness of the legislation or making policy recommendations, anti‐predatory lending laws, restrictions on creditor collection practices, and disclosure regulations aimed at improving consumer protection mechanisms (Ardic et al, 2011; Benmelech & Moskowitz, 2010; Cho & Park, 2021; Harvey & Nigro, 2004; Koch, 2015; Kriese et al, 2019a; Steinbuks & Elliehausen, 2014).…”

“…Former studies focusing on financial services consumer protection tend to focus on documenting regulatory practices, evaluating the effectiveness of the legislation or making policy recommendations, anti-predatory lending laws, restrictions on creditor collection practices, and disclosure regulations aimed at improving consumer protection mechanisms (Ardic et al, 2011;Benmelech & Moskowitz, 2010;Cho & Park, 2021;Harvey & Nigro, 2004;Koch, 2015;Kriese et al, 2019a;Steinbuks & Elliehausen, 2014).…”

The Relationship between Regulation and Consumer Protection in the Non-Banking Financial Sector: A South African Perspective

“…The South African government has adopted approaches to market conduct and consumer protection in the financial sector with the aim of protecting the most vulnerable customers [13]. In fact, due to the challenge in developing economies like South Africa where average consumers demonstrate low awareness of their rights, there is a need for heightened effort for consumer protection [14,15].…”