In 1887, the Interstate Commerce Act was passed, and the first regulatory commission in the U.S. was created, the Interstate Commerce Commission (ICC). The ICC was put in place to oversee the railroad industry. The industry had become a discriminatory monopoly rife with prohibitive pooling of markets and outright extortion. With this act, America officially challenged the philosophies of laissez-faire economics and set the groundwork for perpetual political debate. This debate, between regulation and deregulation, consumer protection and consumer accountability, and benefit and burden, is felt today across the consumer finance industry.
This debate, however, is not a simple one, nor is it likely to find a consensus. America has become so polarized, both socially and politically, that for many people, anyone who is not with them is perceived to be against them. We’ve lost sight of compromise and reason. We’ve become a nation where lack of conformity to prevailing social momentum leaves one defined as part of the problem. Ninety-nine percent is no longer good enough. We are a nation of absolutes.
But this isn’t a political piece; it is a business one. Nonetheless, the problem remains the same: Regulatory oversight has become an all-or-nothing proposition. As business leaders in consumer finance, where innovation drives social and economic advancement, we are getting dangerously close to leaving common sense behind. If we do, we risk eradicating competition and, even worse, overburdening the very people who need our services most. If we become a nation of regulators, as opposed to a nation of innovators, we may add to the very problems we’re trying to solve.
Good Intentions
Regulatory oversight, historically, has been supported as an instrument to combat economic monopolies and social inequity, as seen with the formation of the ICC. That torch continues to be carried today, across the U.S. consumer finance sector, by organizations including the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC). The OCC dates back to the National Currency Act in 1863, and the CFPB was spawned out of Dodd-Frank being signed into law in 2010.
The intentions with such initiatives have always been good: protect the people from unscrupulous agents and create a culture of corporate accountability by penalizing exploitation. In theory, it not only makes sense but is nearly beyond refute. In practice, however, it can be argued that such extensive policy has created an environment of fear and groupthink that stymies innovation, prevents growth and reduces access to services.
Benefit Or Burden
In a nation defined by absolutes, working in consumer finance poses unique challenges. Regulatory principles, if too well defined, allow for exploitation of protections through semantic loopholes and creative interpretations of written law. Alternatively, too much ambiguity leaves organizations vulnerable to overzealous examiners and often results in risk avoidance replacing risk management within the walls of America’s financial institutions. Ultimately, in either case, the people who suffer most are the consumers.
One way consumers suffer is through overregulation. Overregulation is most easily understood through the lens of overdisclosure, a byproduct of regulatory agencies trying to control too much. It comes when policymakers, regulators and compliance professionals mistake their role in the financial system as deterministic, not participative. The end result is empowered shortsightedness that holds businesses hostage and risks creating consumer harm.
Consider the following: an online loan application that includes multiple pages of complexly layered disclosures, composed of obscure language, which cites statutes and regulations most people have never heard of. Additionally, the body of the application itself is difficult to navigate because certain common terms, which would otherwise be intuitively understood, cannot be included due to the affixation of said terms to other obscure regulatory statutes.
Is this good or bad for a consumer?
It’s bad. By making the process of securing financial services so complex and convoluted, we’re engineering apprehension and negligence. Consumers who grow apprehensive are far more likely to abandon the process and therefore go without the service they need. Those who bypass all disclosures, refusing to deal with the complexity, risk taking on a debt they can’t manage. Both scenarios could have been prevented had the presentation of obligation and liability been more easily consumable.
We’re in danger of reaching a point where we’re providing so much information that we’re actually preventing informed decisions. We’re causing the problems we’re paid to solve. We’re manufacturing consumer harm. We’re narrowing access. We’re erring on the side of absolute, where 99% isn’t good enough, and this inflexibility is being paid for by those most vulnerable.
The Death Of Common Sense
In 1994, Philip K. Howard published a New York Times bestseller entitled The Death of Common Sense. In it, he wrote that “Law is supposed to be a framework for humans to make choices, not the replacement for free choice.” This is a powerful sentiment, and one that aligns with the conundrum detailed herein. He writes of oversight forcing an abandonment of instincts, and he highlights how uber-rationality caused more harm than good. People ended up worrying and equivocating so much that the energy diverted prevented progress. Clearly, he was onto something, not just in the legal realm, but across the human condition.
The CFPB has done a tremendous amount of good. Since 2011, the agency has returned billions of dollars to millions of exploited consumers. Nonetheless, the debate remains, has it, and other regulatory agencies, reached the point of overcompensation? No agency, no government entity, can standardize the human condition. At some point, 99% has to be good enough. There has to be a middle ground. There has to be tolerance for some nonconformity. If we reach a point where regulators define a business, then we may as well trade in our business plans for an examiner’s manual.
If that happens, we owe an apology to the American consumer. Let’s just apologize in a way they’ll understand, without evasive language and regulatory jargon. We at least owe them that.
This article originally appeared on Forbes.
