Regulatory News

The Role of Financial Regulation in Protecting Consumers – Governor Philip R. Lane


It is pleasure to visit University College Cork and I thank the Financial
Services Innovation Centre for hosting this talk.   Today, I aim to outline the
Central Bank’s approach to fulfilling its consumer protection mandate.  I will
first discuss the underlying theoretical case for regulatory interventions to
protect consumers. Next, I will describe the institutional framework for
consumer protection at domestic and international levels.  I will then explain
our vision for how the Central Bank can contribute to consumer protection and
the methods by which we implement this agenda.  I will then turn to laying the
current priorities in our consumer protection work. Finally, I will discuss some
developments that will influence the nature of consumer protection regulation in
the coming years.

The Case for Consumer Protection

A vast empirical literature shows that consumers tend to make poor financial
choices, taking on too much debt, misunderstanding investment risk and choosing
financial products that do not match their needs. Over recent decades, the
formal economic theory to rationalise these patterns has been developed, with
insights from economics and psychology blended in the vibrant fields of
behavioural economics and behavioural finance. [1]

The fast pace of financial innovation has created a complex world for
consumers, where the range of available financial products is broad, and the
consequences of financial choices are significant.  Coupled with this, the
typical household tends to have a limited personal track record in making
financial decisions, since the purchase of financial products happens only
infrequently. This is problematic, since the demands for financial
sophistication and knowledge are sizeable if a consumer is to navigate safely
through the options put forward by providers of financial services. Financial
decisions often require consumers to assess risk and uncertainty, for example,
and to consider trade-offs between the near term and the long term. A growing
body of academic literature shows that, among the general population, the level
of financial knowledge, skills and ability to consider such complexities is

There is also a growing body of evidence from the field of behavioural
economics that consumers are subject to behavioural biases when making
decisions. In other words, decisions are affected by emotions and psychological
experiences, by rules of thumb and accepted norms.  For example, consumers can
exhibit present-biased behaviour, which leads them to over-value payoffs today
relative to payoffs in the future, a bias which can be associated with
self-control problems.[3] In addition, households can be overly attached to
the status quo and suffer inertia bias, taking default options in financial
contracts, failing to switch product or provider even when there are clear
benefits to switching.[4] Retail investors also tend to follow naïve investment
strategies rather than identifying superior options.[5] Consumers can also
exhibit loss aversion bias, meaning that they care more about potential losses
than making equivalent gains.[6]

The design of financial products and services can serve to ease or exacerbate
these biases.  In this context, behavioural economics shows that framing matters
– put simply, firms can present the same information in different ways and this
can lead to different choices by consumers.  A key insight from the recent
experience with financial crisis and from the growing literature on behavioural
economics, is that consumers do not always act in their own best interest. In
addition, market forces do not always act to reduce consumer mistakes. Firms
face their own incentives when designing and framing products, and these
incentives may not align with the best interests of the consumer. For example,
analysis by the Office of Fair Trading in the UK shows that firms can frame
prices in a way that plays on consumer biases.[7] Empirical research also
suggests that firms can choose to market the salient features of products that
appeal to consumer biases, while shrouding the less favourable aspects that
could alter a consumer’s choice to purchase that product. [8] The interactions
between misaligned incentives and behavioural biases can adversely affect
consumer welfare, and there are many examples of analytical work that highlight
such costs.[9]

In summary, there is abundant empirical and theoretical research to show that
consumers do not always act in their own best interest in making financial
decisions and that biases can be exacerbated by the design of financial
products. In this context, financial regulation to protect consumers can play a
critical role and I would now like to talk to you about the institutional
arrangements for the protection of consumers across the globe, and the vision
for consumer protection at the Central Bank of Ireland.

Consumer Protection: Institutional Setup

Around the world, institutional arrangements in place to protect consumers
vary from stand-alone consumer protection agencies to bodies with dual
regulation and consumer protection mandates and bodies like the Central Bank of
Ireland with financial stability, prudential regulation and consumer protection
mandates.[10]  Measures applied to protect consumers range from working to ensure
financial stability, through prudential and macro prudential regulation,
supervision and enforcement to personal financial information and education. 
Whatever the institutional architecture, achieving effective outcomes for the
consumers of financial services requires collaboration between all the parts of
the system.

Here in Ireland, a number of agencies are charged with the protection of
consumers of financial products.  Our prudential, supervision and consumer
protection roles include the setting of statutory codes of conduct for financial
services firms, such as codes on how products should be sold, the information
that should be provided and how complaints should be dealt with.   The role of
the Competition and Consumer Protection Commission includes the provision of
personal finance information and education, including a web helpline and
comparisons of financial products.[11]  The Financial Services Ombudsman
assesses the complaints of individual consumers against their financial services
providers and can direct redress where he finds against a firm.[12] We work
co-operatively for the protection of consumers.  A consumer can also take action
through the courts against a financial services provider, although there is no
legislative provision in Ireland for class actions by a group of consumers.

Following the global financial crisis, there is consensus on the need for
greater international and European convergence and cooperation on how financial
institutions are regulated and supervised. Within Europe, this has resulted in
the setting up of the Single Supervisory Mechanism (SSM) for bank regulation
(although it has no consumer protection mandate), as well as regulatory
initiatives such as Solvency II which has the twin goals of enhancing consumer
protection and maintaining financial stability in the insurance sector, the
Capital Markets Union project and the growth and influence of the European
Supervisory Authorities (ESAs).  In addition, investor protection is being
enhanced through the MIFID II Directive.

The three Supervisory Authorities, the European Banking Authority (EBA), the
European Securities and Markets Authority (ESMA) and the European Insurance and
Occupational Pensions Authority (EIOPA) are working to shape the consumer
protection framework across Europe.[13]  EIOPA, for example, is focused on
promoting transparency, simplicity and fairness in the market for retail
insurance and pension products.  Its guidelines on product oversight and
governance for insurers aim to minimise the risk of consumer detriment and
mis-selling of insurance products and underpin new regulatory requirements under
the Insurance Distribution Directive which must be transposed into national law
by member states by 23 February 2018.  The introduction of EU directives into
national legislation plays an important role in the ongoing strengthening of
protection for consumers within the regulatory framework.

In the international arena, bodies such as the OECD, the G20 countries and
FinCoNet are active in promoting the protection of consumers of financial
services.[14]  In October 2011, a set of ten high-level principles on
Financial Consumer Protection was endorsed by the G20 Finance Ministers and
Central Bank Governors.[15]  These non-binding principles include that:
financial consumer protection should be an integral part of the legal,
regulatory and supervisory framework; there should be oversight bodies
explicitly responsible for consumer protection; all financial consumers should
be treated equitably; honestly and fairly at all stages of their relationship
with financial services providers; and financial services providers and their
authorised agents should aim to work in the best interests of their customers
and be responsible for upholding financial consumer protection. Promotion of
financial education and awareness by all relevant stakeholders as well as
easily-accessible clear information on consumer protection, rights and
responsibilities and the disclosure to consumers of key information informing
them of the fundamental benefits, risks and terms are also among the high-level
G20 principles.    

Our Vision

At the Central Bank our mission statement is “Safeguarding Stability,
Protecting Consumers”. 
 Our vision is of a well-functioning, well-managed
and well-regulated financial services system that is underpinned by a strong
culture of compliance, with firms and individuals within firms acting in the
best interests of their customers, backed up by comprehensive and enforceable
legislation, rigorous supervision, a credible threat of enforcement and powers
of redress when consumers have suffered detriment.  

A fundamental protection for consumers lies in ensuring that the financial
system is stable and the firms that operate within it are financially safe and
sound.  This means, inter alia, that investor assets are safe and available and
that an insurer’s promise to pay out in the event of an unforeseen future loss
will be honoured. 

Our aims are articulated in our 5 C’s framework. In order for regulated firms
to act in the best interests of Consumers, all regulated firms should
embed and demonstrate a positive consumer-focused Culture which will
allow consumers to have Confidence in the financial decisions they are
making and the firms they are dealing with.  We Challenge firms where
their focus is not on positive consumer outcomes and we take appropriate
regulatory action to ensure that firms meet their statutory Compliance

As well as working to develop a positive consumer focused culture within
firms, we continue to develop and review our consumer protection framework to
enhance the protections in place.  In this regard we participate actively in the
European and International bodies, including the three European Supervisory
Authorities and FinCoNet, to influence the future shape of consumer protection. 

Our Methods

Let me explain our working methods.  As an integrated organisation, we work
to deliver consumer protection through a continuum of functions ranging from
financial stability, through authorisation, prudential regulation, supervision
and inspections to enforcement and redress.

As I said earlier, ensuring that the financial system is stable and the firms
that operate within it are financially safe and sound is a basic level of
protection for consumers. A recent example is the introduction of the
macro-prudential mortgage lending rules aimed at reducing the risk of
overheating in the housing market and reducing the risk of consumers

In our role of authorising financial services firms to operate in the Irish
market, we act as a gatekeeper to protect consumers.  We are rigorous and
challenging in our application of the requirements and standards so that the
firms we authorise can be expected to meet the best interests of consumers.  Our
criteria include: the fitness and probity of individual directors and senior
management; the adequacy of firm capital; the adequacy of internal controls and
risk management systems; and the level of resources and expertise of staff.   We
can and do refuse applications from financial services providers and we can and
do withdraw or revoke authorisations.  We can investigate individuals performing
specific functions where we suspect an individual’s fitness and probity.  We can
issue a suspension notice and/or a prohibition notice potentially prohibiting
the individual from performing all such functions indefinitely.

As prudential regulator, we have regular supervisory engagement with firms. 
During this engagement, we may identify an issue or process that is not
necessarily consistent with the best interests of consumers.  In such cases, we
can seek additional information, request the firm to perform a task, cease a
practice or modify a process.  In the first instance, we may require the firm to
mitigate the risk but we can also use our regulatory powers to issue a direction
to the firm. 

We use the Probability Risk and Impact SysteM (PRISM) as our framework for
the supervision of regulated firms.  We developed this risk-based framework so
that we could prioritise our work and target our finite resources on the highest
level risks.  It allows supervisors to judge the risks a firm poses to the
economy and the consumer and mitigate those risks we consider unacceptable.  To
identify high- level risk issues, we build business intelligence through the
analysis of, for example, data on sales, complaints about products and services,
advertising spends, new business and product development, issues arising from
queries and social media, horizon scanning and feedback from supervisors,
enforcement and authorisation officers.  This helps us to detect and understand
where potential consumer detriment can arise and helps supervisors compile
conduct risk reports on which our actions to mitigate risk will be based. 

We use themed inspections to focus on a specific issue, topic or product
rather than on a specific institution.  We identify the themes to pursue in a
number of ways, including consumer queries, complaints, issues arising from
previous inspections, market intelligence and annual sectoral risk assessments,
as well as advice from the Consumer Advisory Group on our consumer protection
strategy and policy initiatives.[16]  Themed inspections are conducted by
survey or by a combination of survey and on-site inspections.  Following a
themed inspection, we issue firm-specific letters, an industry-wide letter and a
press release and publish our findings on the Central Bank website. Where we
identify a specific compliance issue in an individual firm, we address this
directly with the firm.

A credible threat of enforcement underscores our powers to protect consumers
of financial services.  We take robust enforcement action aimed at promoting
principled and ethical behaviour by and within regulated entities.  Transparent
and strong action where entities or individuals fall short of required standards
helps to deter poor practices, achieve compliance and encourage the behaviour we
expect.  We take action where firms or individuals have breached provisions in
prescribed legislation, a code, or a condition, requirement or obligation
imposed by the Central Bank.  In 2013, legislation provided the Bank with formal
redress powers to direct regulated financial services firms to make appropriate
redress to customers where they have suffered or will suffer a loss as a result
of widespread or regular relevant defaults by a regulated financial services
provider. Where consumers suffered detriment prior to 2013, we have used our
influence to obtain redress for consumers on a range of issues including payment
protection insurance and credit card protection insurance, as well as part of
the tracker mortgage examination. 

Current Priorities

We set out what we see as the key risks now facing consumers in our Consumer
Protection Outlook Report, which was published last week.[17] These range
from the absence of a consumer-focused culture in financial services firms,
through the ongoing problems of high levels of indebtedness and mortgage
arrears, to the implications for consumers of the significant increases in the
cost of health and motor insurance.  There are risks to consumers from poor
product design and marketing especially where products are complex and terms and
conditions may be difficult to understand.  There are risks, as well as
advantages, for consumers from the greater use of technology to deliver
financial products and services and from the pace and scale of technological
innovation in the financial services sector.  And there are potential risks for
consumers from the changing international economic and political landscape from
Brexit to the post-Trump reform of regulation in the United States.

In a recovering economy, there are also risks for consumers.  We see an
increase in the level of new lending in all areas which needs to be managed by
lenders to ensure that new debt is both affordable and suitable for the
borrower.  Lenders are aware that they are required under our Consumer
Protection Code to assess affordability and to lend responsibly on a case by
case basis.  In a low interest environment earning a return on savings or
providing for retirement is more difficult and firms need to make their
customers aware of the increased risks involved in products that offer higher
rewards.  Again, regulated firms know that they are required to ensure that the
products they sell to their customers are properly explained and understood and
appropriate to that customer’s risk appetite. 

Having identified these and other risks, what is the Central Bank doing to
address these risks and to enhance its protection of consumers? First, we
continuously assess our consumer protection regulatory framework to ensure it is
fit for purpose and working for consumers.  To do this we use market
intelligence, our supervisory experience, consumer research and insights into
consumer behaviour as well as feedback from key consumer protection bodies such
as the Competition and Consumer Protection Commission and the Financial Services
Ombudsman. European legislation, including new directives, as well as wider
international developments continue to shape our framework.  We are active
participants in the three European Supervisory Authorities as well as in
FinCoNet. Ongoing developments in the consumer protection framework include the
implementation of EU Directives in Insurance, Payments Services and Markets in
Financial Instruments and reviews of our Codes, including the Minimum Competency
Code and the Consumer Protection Code for Licensed Moneylenders.

I referred earlier to the risk to consumers from the absence of a
consumer-focused culture within financial services firms.  What do I mean by
such a culture? We see a positive consumer-focused culture as one in which
financial services firms communicate clearly with their customers, help
customers to understand the financial products and options available to them and
to make the financial decisions that best meet their needs.   It is a culture in
which consumers can be confident that firms are acting in their best interests. 
It is a culture in which boards and senior management set the tone through their
commitment to achieving good outcomes for their customers.  It is a culture
where a firm engages constructively with customers who have queries or
complaints and which rectifies its errors or mistakes.  It is a culture where
staff are incentivised to build good customer relationships and to aim to sell
appropriate products rather than large numbers of products.

Our work to promote the development of a consumer-focused culture includes
directing all banking, insurance and investment firms to review and restructure
their incentive payments for sales staff in light of guidelines we issued to
ensure that employees, individually and collectively, act in the best interests
of their customers and provide products suitable to their needs. We are
currently examining additional measures to ensure that firms remuneration
structures for intermediaries encourage responsible business conduct, fair
treatment of consumers and to avoid conflicts of interest.

There has been progress by some firms towards this type of culture but there
is a long way to go.   Firms need to put internal consumer risk management
frameworks in place to help make the shift to a consumer focused culture. 
Recognising the fundamental importance of risk management in achieving this
cultural shift, we have enhanced our on-site Consumer Protection Risk Assessment
model (CPRA), which provides us with a robust framework to assess how consumer
risks are being identified and managed by firms. The new model equips us to
assess how firms’ risk management frameworks are designed and governed, but also
how effective they are in practice at delivering fair consumer outcomes.

Following the successful pilot-testing of the model in 2016, we will conduct
a series of targeted CPRAs across the different retail sectors throughout 2017,
with a particular focus on culture, performance management, sales incentives and
product governance.  The CPRAs will be in addition to and support our regular
programme of consumer-focused thematic inspections, which examine how firms are
selling their products and services in practice.  And we continue to engage with
the boards and senior management of regulated firms to ensure there is a very
clear focus from the top on embedding and measuring the firms cultural change

Looking to the Future

In determining the appropriate scope of the Central Bank’s work to protect
consumers, I would like to sound a note of caution.  The Central Bank is
committed to working effectively to protect consumers of financial services but
it is important we do not over-promise on the outcomes we can achieve. The goal
is to secure an appropriate degree of protection of consumers while recognising
that expectations of what can be achieved through regulatory mechanisms need to
be reasonable.

It is inevitable that consumer protection issues will arise that could not
have reasonably been foreseen or may be the result of fraud, criminal conduct or
human error.  What is important is that where these issues arise, we take
corrective action swiftly and work to redress the detriment to consumers.  The
Central Bank played a leadership role in this area with the development of the
Consumer Protection Code and we continue to pursue a strong consumer protection
agenda through our involvement in European and international bodies. 

It is important to appreciate that much of the consumer protection work
undertaken by the Central Bank is not publicly visible, such as when we take
action to address potential problems at the outset and thus avoid consumer
detriment.  Examples would include where we refuse to authorise firms to offer
financial services here, where we identify issues through supervision or themed
inspections and take action to mitigate before consumer detriment arises. 
Restitution of over €19 million was paid to consumers in 2015 on foot of issues
identified through our supervisory activity. We have also taken strong
enforcement action – since 2010 we have concluded some 80 enforcement cases,
half of which dealt with consumer issues. We have imposed fines totalling over
€46 million and have removed individuals for the management of firms.

But this is a challenging area and sometimes our best efforts will not
achieve our desired targets or may not progress as quickly as we would wish.  In
tackling the issue of the fair treatment of tracker mortgage customers, for
example, we have initiated the largest and most complex consumer protection
investigation we have even undertaken.  To ensure that a fair outcome is
achieved for consumers this review will some take time.  We have required each
lender to carry out a thorough, comprehensive and robust review which is
independently overseen.  Some two million mortgage accounts are being reviewed
and lenders will have to pay redress and compensation to affected customers and
are facing enforcement action by the Central Bank.  We have fined one lender
€4.5 million and directed that its customers receive appropriate redress and
compensation – by November 2016, this had amounted to €5.8 million.  Two other
enforcement cases are currently ongoing. 

As we strive to protect the consumers of financial services, I believe that
more needs to be done to empower consumers in their dealings with financial
services firms.  Improving financial literacy is an integral part of the
consumer protection agenda.  International financial literacy studies indicate
that a majority of the world population do not have sufficient knowledge to
understand even basic financial products and fail to make effective decisions to
manage their finances and the risk associated with them.  The OECD and G20 have
advised that this needs to be undertaken through nationally coordinated and
tailored approaches.[18] 

At the Central Bank, we know we need to deliver effective protection for
consumers of financial products and services in a rapidly evolving financial
services landscape. It is our responsibility to respond to emerging threats, to
be vigilant to evolving potential threats and to be proactive in tackling risks
to consumers. Looking ahead, consumers would benefit from simpler products for
example in the areas of pensions and health insurance.  In the insurance sector,
work needs to be done to attain the goal of consistent supervisory standards
across Europe and to coordinate the various national protection schemes for

Finally, the technological innovations that bring the potential benefits of
lower costs, speed, automation and convenience for consumers also pose some
challenges for regulators in relation to consumer protection.  Our focus is on
ensuring that the appropriate frameworks are in place so that firms must take
the best interests of consumers into account in their design, operation and
monitoring of online distribution and automated advice channels.  Furthermore,
given the scope for online distribution channels to foster cross-border trade in
financial services, it is essential that the legislative framework fosters
internationalisation without compromising consumer protection.

Acknowledgements: I thank Mary Canniffe, Yvonne McCarthy and Helena
Mitchell for their inputs into this speech.


Badarinza, C., Campbell, J. Y. and Ramadorai, T. (2016). International
comparative household finance, Annual Review of Economics, 8, pp. 111-144.

Benartzi, S., and Thaler, R.H. (2001). Naive Diversification Strategies in
Defined Contribution Savings Plans. American Economic Review, 91(1), 79-98.

Campbell, John Y., Howell E. Jackson, Brigitte C. Madrian and Peter Tufano
(2016), “Consumer Financial Protection,” Journal of Economic Perspectives 25(1),

Campbell, John Y. (2016), “Restoring Rational Choice: The Challenge of
Consumer Financial Regulation,” American Economic Review: Papers &
Proceedings 106(5), 1-30.

Choi, J.J., Laibson, D., Madrian, B. C. and Metrick, A. (2005). Optimal
defaults and active decisions. NBER Working Paper no. 11074. Cambridge, MA:
National Bureau of Economic Research.

DellaVigna, S. and Malmendier, U. (2004). Contract Design and Self-Control:
Theory and Evidence. Quarterly Journal of Economics, 119(2), 353–402.

Gabaix, X., and Laibson, D. (2006). Shrouded Attributes, Consumer Myopia, and
Information Suppression in Competitive Markets. Quarterly Journal of Economics,
121(2), 505-40.

Heidhues, P., and Kőszegi, B. (2010). Exploiting Naïvete about Self-Control
in the Credit Market. American Economic Review, 100(5), 2279-2303.

Loewenstein, G., O’Donoghue, T., and Rabin, M. (2003). Projection Bias in
Predicting Future Utility. Quarterly Journal of Economics, 118(4),

Lusardi, A. and Mitchell, O.S. (2007). Baby boomer retirement security: the
roles of planning, financial literacy and housing wealth, Journal of Monetary
Economics, 54(1), pp. 205-224.

Lusardi, A., Mitchell and Curto, V. (2010). Financial literacy among the
young, The Journal of Consumer Affairs, 44(2), pp. 358-80.

Lusardi, A. and Mitchell, O.S. (2011). Financial literacy around the world:
an overview, Journal of Pension Economics and Finance, 10(4), October.

Lusardi A. and Tufano, P. (2009). Debt literacy, financial experiences and
overindebtedness, NBER Working Paper No. 14808.

Madrian, B., and Shea, D.F. (2001). The Power of Suggestion: Inertia in
401(k) Participation and Savings Behavior. Quarterly Journal of Economics,
116(4), 1149-1187.

Office of Fair Trading (2010). The Impact of Price Frames on Consumer
Decision Making. London: Office of Fair Trading.

Henderson, B.J. and Pearson, N.D. (2011). The Dark Side of Financial
Innovation: A Case Study of the Pricing of a Retail Financial Product. Journal
of Financial Economics, 100(2), 227-247.

Lusardi A. and Tufano, P. (2009). Debt literacy, financial experiences and
overindebtedness, NBER Working Paper No. 14808.


[1] See Campbell et al. (2011), Campbell (2015), Badarinza et al. (2016) for
surveys of the literature.


[2] See Lusardi and Mitchell (2007, 2011), Lusardi et al. (2010) and Lusardi
and Tufano (2009).


[3] See Loewenstein et al. (2003), Della Vigna and Malmedier (2006) and
Gabaix and Laibson (2006)


[4] Madrian and Shea (2001) and Carroll  et al. (2009).


[5] Benartzi and Thaler (2001).


[6] Heidhues and Kőszegi (2010).


[7] Office of Fair Trading (2010).


[8] Henderson and Pearson (2011)


[9] May et al. (2014) and Lusardi and Tufano (2009).


[10] Consumer Protection agencies such as the Financial Conduct Authority in
the UK, the Netherlands Authority for the Financial Markets, and the Financial
Consumer Agency of Canada do not have a prudential regulation role.  Agencies
with dual regulation and consumer protection mandates include the German Federal
Financial Supervisory Authority (BaFin), the Financial Supervisory Authority in
Denmark and the Financial Supervisory Authority of Norway.  The Central Bank of
Ireland and the Central Bank of Portugal have financial stability, prudential
regulation and consumer protection mandates.






[13] , , .


[14] FinCoNet is the international organisation of financial consumer
protection supervisory authorities.


[15] G20 High-Level Principles on Financial Consumer Protection.  Published
by OECD October 2011. Followed by “Effective Approaches to Support the
Implementation of the remaining G20/OECD High-Level Principles on Financial
Consumer Protection”.  Published by OECD September 2014. 


[16] The Consumer Advisory Group was set up under the Central Bank Reform
Act 2010 to advise the Central Bank on the performance of our functions and the
exercise of our powers in relation to consumers of financial services.




[18] Advancing National Strategies for Financial Education:  OECD  2013
message from Anton Siluanov Minister of Finance Russian Federation.  P 6

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