What Is Meant By Consumer Protection

Published Date: 02 Nov 2017

From the world side, "The reason why the financial crisis would happen was the interplay between macroeconomic imbalance". [1] But why the macroeconomic could imbalances, from Adair Tuner’s view was that there are a large amount of current account surpluses in exporting countries such as China, Japan and some other Asian countries. But on the other side there have a huge amount of current deficits countries such as United States and United Kingdom. Those countries in order to reduce their current deficits they need to low down the interest rate to attract more foreign investment. "In 1990, if you invest government bonds in the UK or US market the risk free return will be about 3% real, however the real return has been less than 2% and even lower than 1%." [2] This very low interest rates driven two factors, the first one is the rapid growth of credit extension. Such as residential mortgages in the American, and second is the investors seek more premium profits. They both should be responsible for the financial crisis.

It is true that the financial crisis is beyond human control and it is hardly to prediction. Whereas in the UK regulatory framework there are still some real and significant failings can be find. Undoubtingly regulators failed in recognizing and quick replying to the problems that were developing within the economic scheme. [3] 

In UK there have a tripartite system which is responsible for financial stability: HM Treasury, Bank of England and the FSA, obviously the system did not work well, otherwise we would not be suffering such a serious financial crisis. The tripartite system failed in a number of important ways. For instance, "the system has failed to distinguish the problems in the financial system, failing to take steps to elimination them before they led to a damage in financial markets and failing to deal with the crisis when it did break, especially during the first part of the crisis in the summer of 2007." [4] as a financial regulatory authority the tripartite system should shoulder all the responsibility, which is supposed to deal with all the problem in order to protect investment institutions’ security and robust to the client performance. [5] 

Why the tripartite system would fail to recognize this problems? There are several weakness in this system. For example, there is no defined lead in this system, it is unclear who was in charge. they all paly an important role in this system when the financial crisis occurred they did not know which department’s order should be follow. Another main reason why the tripartite system would fail was that the system give the bank obligation to keep the financial stability but they did not provide the bank with appropriate tools. Similarly even the Treasury have the obligation to maintaining the whole institutional framework "but no clear responsibility when they was dealing with the financial crisis which will put tens of billions of public pounds at a risk." [6] . What is more there is no any other single organized or authority have the power to monitor or even influence the tripartite system decision, to find the potential risk at the very beginning and to take action as fast as possible. From Adair Turner point of view this phenomenon is called ‘underlap’ a picture why "macro-prudential risk analysis and mitigation fell between the gaps in the UK regulation system." [6] what is more the Turner also statement that ‘the FSA’s approach to micro-prudential regulation was flawed.’ The FSA depend too much on ‘tick-box’ compliance with rules when they deal with financial crisis. An effective regulation of firms should fully understand their business model and have the ability to judgment the risk from firms’ side.

ALL above these are the key to explain why the tripartite system of financial regulation would fail to recognize this crisis in the UK. The system of regulation failed will bring some effects to the consumers.

First a large amount of manufacturing industry is facing the threat which come from bankruptcy and lots of companies will reduce their employees, so it will be appear a high unemployment rate. Second, because the high unemployment rate the consumer have no confidence to consumption not only the investor. The ordinary citizen starting to worry, anyone could lose their job at any time they need to deposit some mony into the bank. Even now the higher inflation rate could let the money which they deposit in the bank rapidly devaluation they still don not want to withdraw money out of the bank for consumption. If consumers deposit too much money in the bank, then the economy will be stagnate. This why every countries’ central bank will make a variety of policies to decrease the interest rates, they expect these measures could improve the consumer’s confidence and stimulate consumption. Third, many commodities will rapid deterioration, including cars and real estate. Due to the demand rapid contraction.

What is meant by consumer protection and does this differ from investor protection?

First the consumer is different from the investor. Relative to the investor this consumers are not equipped with professional financial knowledge background. The United States has issued a regulation in 1999 which was called 《The modernization of financial services act》, in this regulation they defines ‘consumers’ as the mainly personal, family or families need from financial institutions to obtain personal financial products or financial services. [7] From this point they are different from the investor. Whose mainly purpose was gaining the premium profit through buy or sell financial products. The reason why they will purchase financial products is for added value instead of consumption. Therefore they can not be classified as consumer. What is more, although they are belong to the individual investors, seeming that they were taking a weak position in the market. They have stronger ability to identification and avoid the risk, hence they have stronger bargaining power in the capital marker compared with the operator. In other words they can make up their own weakness through their professional financial knowledge, and the low is not necessary to give them some special protection. Basically the consumer protection will protect the consumer’s safety rights, including two aspects personal safety and property security. Privacy rights, the financial company is forbidden to provide the consumer’s information to the third party without the permission of the consumer. The rights for redress, when the consumer’s legitimate rights has been aggrieved, they have the rights to obtain compensation.

At the same times the authorities notice that the consumers were complained about they did not get enough protection or regulatory focus, especially when they doing business with some financial individual firm. Hence in the new financial regulation system there will be a brand new division called consumer protection and markets authority which will take responsible for this. The CPMA’s major responsible is promote confidence in financial market and its has two objectives. "First, they will protection of consumers especially in retail consumers. And second, through promoting confidence in the integrity and efficiency of the UK’s financial market." [8] 

Will the new FCA be able to protect consumers better as part of the new regulation structure or the FSA was able to do it under the old system? This is still has no clearly definition. For instance although the CPMA has taken all of the responsibilities for conduct of business regulation and supervision from FSA and they have the rights to make regulator for consumer protection, [9] currently there are two institution responsible for regulating consumer finance. One is the FSA ,it is responsible for regulating consumer financial activity. Another authorities is Office of Fair Trading which will responsible for regulation consumer credit. This may cause some confusion about consumer protection. Therefore the government intends to transfer of responsibility for consumer credit from the OFT to the new CPMA [10] . Only the time will tell us whether the new regulation is better to protect consumers.

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