Courtesy of Elena Botella
Consumer protection doesn’t appear to be very high on the Trump administration’s list of priorities. In fact, since President Trump tapped Mick Mulvaney to lead the Consumer Financial Protection Bureau in November, a number of regulations and initiatives introduced during the Obama years have been rolled back. This includes relaxing restrictions on payday lenders and attempting to eliminate the publicly accessible consumer complains database. Given that the administration’s pick to replace Mulvaney, Kathy Kraninger, is considered to be a “staunch supporter of free enterprise,” we should expect this deregulatory trend to continue.
Given the controversies emanating from the CFPB, it is easy to overlook consumer friendly reforms that are occurring in other countries. Below, I examine recent reforms in Australia, Singapore, and the United Kingdom that aim to give consumers greater control over their financial lives. While these reforms are still in the early stages, it is worth keeping an eye on how they impact credit availability, consumer well-being and bank profitability going forward. Should a future administration reverse course at the CFPB, these reforms may gain traction in the U.S.
This past February, the Australian Parliament passed a law requiring credit card providers to let customers close accounts and lower credit limits online, stopping banks from persuading customers to change their mind once they’ve called it quits. Major U.S. banks are split on whether they should let customers close accounts online; some, such as Discover and Bank of America, require a phone call or paper letter to close an account. Others, like Citi and Chase, honor customer requests to close accounts placed online but don’t have a straightforward link to follow – bank representatives explain you have to send a message in their secure message center.
The more controversial aspect of Australia’s law is the prohibition on credit card companies raising a customer’s credit limit without a customer request and banning banks from ‘prompting’ customers to initiate credit limit increases. While higher credit limits can give consumers flexibility, they can also pose an irresistible temptation for customers to increase borrowing. Researchers Scott Schuh from the Federal Reserve Bank of Boston and Scott L. Fulford of Boston College, found that for the subset of Americans who carry revolving balances on their credit cards, “nearly 100% of an increase in credit limits eventually becomes an increase in debts.” Legal Scholar, Angela Littwin, has found that many low-income Americans want policy reforms to address practices associated with credit limit increases – as stated by one survey participant, banks “shouldn’t […] tempt people by saying every three or four months, oh, your credit limit has been increased.” Littwin suggests that rather than credit limits being at the “exclusive discretion of credit card issuers […], consumers would benefit if credit limits were mutually determined.” Of course, clamping down on the banks’ ability to extend credit limits runs the risk that consumers will turn to higher interest forms of debt, like payday loans, if they find themselves in need of credit that isn’t readily available. Another potential problem with the Australian decision is that it may push banks to assign higher credit limits to customers initially, when they have less information about who can afford to repay and who can’t.
The changes made in Singapore are more popular with banks but still have clear consumer benefits. The MyInfo program, launched by the Singaporean government in 2017, allows consumers to import their data from various government agencies – things like name, address, income, employment, and education history – when they apply for a new bank account or loan. Given the size and scale of the Equifax hack in 2017, it is easy to see the appeal in giving consumers more control over their data, rather than relying on unaccountable third parties like credit bureaus to validate identities and provide information to banks. In fact, Equifax’s “Workforce Solutions” division, reported to be worth $9B, is still able to store and sell the employment and income data of millions of Americans, whether they’ve opted in or not.
Making it easier for Americans to validate their identify and income through a program like MyInfo would help banks root out fraudsters and distinguish between real people and “synthetic identities”, which in turn would increase credit availability for the millions of Americans with limited credit history.
The reforms pursued by Financial Conduct Authority (“FCA”) in the United Kingdom are amongst the most radical, directly targeting a group of consumers that are very profitable for banks — the ones who sustain high levels of debt over time without actually ‘charging off’ or defaulting on their debt. As of September of this year, British banks are required to intervene when a customer has been in persistent credit card debt for 18 months, by recommending that a customer increase their payment amount. If the customer is still in persistent debt at the 36 month mark, banks will have to offer a payment plan. If that’s not successful, banks will need to cancel some, or all, of the debtor’s fees and finance charges to help dig the customer out.
The FCA’s reforms are novel – especially compared to U.S. consumer laws – because it they takes an “outcomes” based approach rather than an “inputs” based approach to accomplishing public policy objectives. The FCA defines what they don’t want to happen – consumers trapped in a constant cycle of debt – and give banks a range of options for preventing the bad outcome; whether that’s through different credit policies, different marketing tactics, lower fees or interest rates, or by behavioral interventions to encourage customers to repay their debt faster.
What will all these changes mean for credit availability and consumer indebtedness in Australia, Singapore and the U.K.? For the most part, it’s too early to tell. Nonetheless, it is encouraging to see regulators in other countries experiment with new policies designed to protect consumers. If these policies prove effective, I expect more countries will follow suit, perhaps including the United States.