What can governments do to help consumers protect their interests when dealing with financial institutions? (Or any other industry) I suggest increasing competition and requiring firms to publish more information would be more effective than regulation.
I figure governments pass legislation to restrict competition. This allows firms in the protected industry to collect profits they wouldn’t otherwise get. When the firms protected by the legislation get out of hand and blatantly exploit their customers governments introduce regulations to limit the offensive behavior. This is to protect consumers.
Generally the way to restrict competition in the financial industry is via licensing. Therefore the way to increase competition is to loosen licensing requirements so that more firms can get into the industry. More competition should reduce the opportunities for exploitive behavior.
The other way to protect the interests of consumers is to require firms to publish plenty of information about their business so their customers have the knowledge with which to protect themselves. In banking this should include detailed information about their loan portfolios.
Shouldn’t depositors have the right to know to whom their money has been loaned? If a depositor has this information then he or she can evaluate the safety of the deposit. If there are concerns about where a firm is lending one’s money then one can take the deposit someplace else.
This post was written after reading in The Guardian a concern that financial reform in Britain will not lead to more competition. You can see the article here.
Filed under: banks, money, Economics | Tagged: banks, Competition, consumers, customers, depositors, Economics, financial institutions, governments, legislation, loan portfolios, Regulations | Leave a comment »