Chapter 10: Finance and the Household
John Grahl INTRODUCTION Most discussion of regulation in the financial sector identifies two broad motives: stability and consumer protection.1 The issue of financial stability is dealt with in Chapter 7 above and again in chapter 14; thus the present chapter concerns only consumer protection.2 It should be noted, however, that sometimes the actual regulatory measures which might be adopted on grounds of stability coincide with those taken to protect the consumer of financial services; for example, measures to maintain confidence in the banking system can serve both purposes. Information Asymmetries Much of the mainstream literature on regulation runs in terms of information asymmetries between the suppliers and the users of financial services. The basic notion is that retail consumers, whether individuals, households or small businesses, have much less information about the efficiency, quality and honesty of specific financial service providers than do the providers themselves. If then consumers are unable to discriminate between good and bad services, they may simply distrust all suppliers rather than choosing the best. This limits the market for the service in question; indeed it may, in the limit, prevent any transactions at all. Honest and efficient suppliers are penalized by the activities of dishonest and inefficient ones. Among the factors leading to information asymmetries is the fact that households may transact much less frequently than the financial companies with which they are dealing – for example, someone may only ever need to arrange one or two mortgages – and this means they are bound to lack the...
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