Making Outcomes Matter: An Immodest Proposal for a New Consumer Financial Regulatory Paradigm

Todd H. Baker* and Corey Stone**


          American consumers today access financial services in fragmented, product-specific marketplaces where each provider optimizes its consumer relationships based on profitability.  Providers regularly exploit information advantages, geographical proximity, behavioral biases, high “shopping costs” and other asymmetries. Consumers, under pressure to make quick personal decisions, frequently make suboptimal or affirmatively damaging choices that benefit the provider and constrain the consumers’ options in follow-on decisions. The responsibility for managing outcomes in consumer financial services is—absent the most egregious abuse—left in the hands of the individual consumer. These practices arguably have led to suboptimal outcomes for all consumers and high levels of financial insecurity among the most vulnerable populations.

           In the face of these problems, state and federal governments have, over time, adopted a variety of statutory and regulatory regimes intended to protect consumers. The resulting system of consumer financial regulation inconsistently advances the interests of consumers, particularly more vulnerable lower-income consumers, despite the existence of large bodies of law and regulation and an enormous investment in regulatory compliance by financial services providers. The system has historically operated in a data vacuum where regulators relied on disclosure-based regimes intended to inform consumer choice about product pricing and terms, narrow proscriptions regarding provider practices that impede informed decision making and limited interventions in prices and fees instead of insights about the real-world consequences of product usage.

           This situation has begun to change. Digitization and the ongoing “big data” revolution, coupled with the emergence of new measures of “financial health” outcomes, now make it possible to analyze the impact on individuals of the use of financial services. This, in turn, may allow historic regulatory regimes to be reimagined using these new data capabilities.

           Drawing from experiences with outcome-based regulation in the health care industry, we advance a three-stage proposal to better align financial services provider interests with improved customer outcomes through data analysis, public disclosure and market-based regulatory intervention. The proposal introduces a form of “outcomes-based regulation” to the financial services marketplace that has been advanced elsewhere. Implementation of the new framework would not be an immediate substitute for existing consumer financial protection law. But by generating an empirical basis for identifying harms and benefits correlated with particular practices or product features, it would for the first time allow policymakers to measure the impact of statutory and regulatory interventions, tailor policies to remedy harms incurred by users of particular products and providers and potentially determine product/practice “appropriateness” for particular consumer circumstances. When fully tested and implemented, the three-stage process should shift provider incentives meaningfully towards improved consumer outcomes, leading to a gradual shift away from prescriptive and disclosure-based regulation to a principles-based, data-driven, transparent “learning” system that leverages market mechanisms to deliver improved consumer financial health.

* Senior Fellow at the Richard Paul Richman Center for Business, Law, and Public Policy at Columbia Business School and Columbia Law School, Adjunct Assistant Professor at Columbia Law School and Lecturer at Stanford Law School.

** Entrepreneur in Residence at the Financial Health Network.

*** The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any other agency, organization, employer or company.