Erik Thedéen: How can consumer welfare be improved in financial markets?

Introduction

Financial markets are fundamentally in need of extensive consumer protection.

Most of us are completely dependent on financial services in our daily lives, but studies also show that most of us have a low or very low understanding of the concepts and math needed to understand financial information. This is called low financial literacy.

So, consumers are by default at a disadvantage in their relationships with institutions that provide financial services. And these institutions, which for the most part are serious businesses, face strong financial incentives to attract and keep customers.

The way consumers behave when purchasing financial services also has concrete and financial implications for the real economy. This means that we can't just sit back and wait when we see potential problems. All we need to do is scroll back our timeline to 2008 to see how bad things can get.

It is a balancing act: weighing the need for financial innovation and freedom of choice against the need to protect consumers and safeguard the real economy. And companies must be mindful of consumers' interests and consider consumers' needs and individual circumstances. This is something firms must constantly take into account in their operations and business models.

I would like to talk briefly about two areas in this balancing act that are of concern to us right now.

Financial advice

Over the years, as individual consumers have been given more and more responsibility for their financial future, the market for financial advice has grown substantially.

To offset the apparent dangers of consumers receiving bad – or even worse, misleading – advice, lawmakers have placed a great deal of responsibility on financial firms in terms of which products they produce and distribute and what advice they provide.

In short, the regulations attempt to ensure that firms offering financial advice place the interests of their clients, and not their own business, at the forefront when deciding what products to recommend. Unfortunately, we all too often find cases where this is not the case.

Before the summer, FI withdrew the license of one such financial firm, Exceed, for breaches in its financial advice practices. In short, Exceed sold very complex and often very expensive structured products without making sure consumers understood the risks and costs associated with the investments. For some products, the fees the consumer paid were more than 40 percent of the invested amount.

This is something that both we as regulators and the lawmakers view as unacceptable. It also raises the question of whether these kinds of complex products are appropriate for the average consumer at all.

How firms follow financial advice regulation and work with complex financial instruments is something that we are working with intensely at the moment and will continue to do so in the next few years.

Consumer credit

Another challenge on the financial market is the ease and speed at which consumers can make decisions that have far-reaching consequences. This is particularly evident with unsecured loans, where the desire for speedy transactions has come at the cost of sustainable and solid assessments of consumers' reparability.

The problem, in its essence, is that loans are granted too fast today. The idea that someone can get a loan for hundreds of thousands of kronor within minutes is deeply problematic.

Today, some institutions rely on minimal information about the consumer when granting loans. Without enough information, some creditors cannot make an adequate assessment about the individual. This means, in short, that people who cannot afford to pay back a loan may be granted one nonetheless.

Over-indebtedness is a growing concern, and we are therefore looking into what parameters and information institutions should take into account before granting loans. We will be talking more about this in upcoming months.

We are also conducting a wider investigation into how smaller banks and credit market companies are conducting creditworthiness assessments and whether they are otherwise adhering to generally accepted lending practices. This could lead to sanctions depending on what we find.

Final remarks

To conclude, strong consumer protection is a prerequisite for ensuring the welfare of consumers on the financial markets.

This balancing act is an ongoing process, but in essence the disparity between consumers and producers on the financial markets coupled with the financial markets' strong correlation to the real economy means that strong consumer protection regulation and supervision is and always will be needed in this sector. Financial firms also need to demonstrate that they are mindful of consumers' interests and consider consumers' needs and circumstances.

Thank you!