Enable innovation, ensure positive consumer outcomes, repeat.

Financial consumer protection is the heartbeat of financial legislation and regulation. According to a technical guide published by CGAP, financial consumer protection is a reflection between policymaker’s and regulator’s concerns with the relationships that (digital) financial services providers (FSPs) have with their clients[1]. With the daily task of ensuring market conduct legislation and regulations that ensure consumer protection and produce positive consumer outcomes, policymakers and regulators balance this legislative spirit with their market development mandate.

New international guidance is emerging on consumer protection legislation and regulation such that it focuses more on the consumer’s experiences[2]. This new guidance shows an understanding that the consumer experience is the consequence of an FSP’s products, delivery conduct and business practices. Figure 1 illustrates the core outcomes supported by new international guidance on consumer protection[3].

Figure 1: Supported consumer outcomes.

Source: CGAP (2020)

Now, with an understanding of the supported consumer outcomes, financial policymakers and regulators need to ensure that FSPs are behaving responsibly towards the consumers. How can they encourage this kind of behaviour? Financial regulators can incorporate these six regulatory elements into their outcomes-based approach:

• Consumer insights.
• Consumer assessment and engagement.
• Consumer recourse.
• Conduct and culture governance.
• Conduct risk management.
• Financial product governance[4].

Financial policymakers and regulators need to balance innovation and consumer protection. As financial policymakers and regulators use various innovation facilitators, which include regulatory sandboxes, innovation hubs, regulatory updates, test-and-learn approaches, wait-and-see approaches, or a new license issuance[5], they need to find a delicate balance between enabling market development and consumer protection that results in positive outcomes. Financial innovation has brought us fintechs, which have introduced new products and business models into the financial sector, fueled by advancements in technology. The range of services offered by the fintech segments offers the promise of meeting the consumer at the point of their need.

However, with the benefits of innovations one can’t ignore and the consumer risks that may arise. From the lessons learned from the research by CGAP, the Financial Conduct Authority (FCA) of the UK introduced a Consumer Duty in July 2022[6], which is an outcomes-based consumer protection financial regulation. The FCA’s approach to this new regulation is to have a central role towards the successful embedding of The Consumer Duty (the Duty) through increasing awareness and understanding of the Duty, building the Duty into the institution authorisation approach, implementing a risk-based supervisory strategy, ensuring that the Duty enforcement strategy will enable the FCA to effectively detect, triage and act on breaches of the Duty, and develop sector-specific data strategies to enable the FCA to identify areas of concern promptly to measure the Duty’s impact.

What does this mean for developing economies? Lessons can be learned from the wealth of research done on the latest international best practices on consumer protection legislation and regulation. Furthermore, developing economies may glean learning from existing outcomes-based consumer protection legislations and regulations, together with peer learning to develop outcomes-based consumer protection legislation and regulation that is specific to the country’s context.

[1] Dias, D. (2013), “Implementing Consumer Protection in Emerging Markets and Developing Economies”, available here.

[2] CGAP (2022), “Customer Outcomes-Based Approach to Consumer Protection: A Guide to Measuring Outcomes”, available here.

[3] CGAP (2020), “Making Consumer Protection Regulation More Customer-Centric”, available here.

[4] CGAP (2020), “Financial Consumer Protection: 3 Steps to Better Customer Outcomes”, available here.

[5] CGAP (2020), “How to Build a Regulatory Sandbox a Practical Guide for Policy Makers”, available here.

[6] FCA (2022), “A new Consumer Duty: Feedback to CP21/36 and final rules”, available here.