The Crash that Launched a Thousand Fixes : Regulation of Consumer Credit after the Lending Revolution and the Credit Crunch

The consumer lending “revolution” - with its promise of the democratisation of credit - has been followed by the credit crunch. The credit crunch has stimulated both immediate regulatory initiatives and more fundamental reflection on consumer credit regulation. As the Turner review in the UK notes, conventional regulatory assumptions - that reputable firms do not place risky products on the market, that innovation is stifled by regulation and that regulators are not as well placed as the market to judge the value of products - have been challenged by the credit crunch. This paper explores an influential neo-liberal approach to the fundamental problems of consumer credit regulation - availability and safety - that is promoted by the World Bank. We discuss the difficulties of achieving effective regulation that is fair and distributionally progressive within the private rights framework of the World Bank’s approach. We then turn to the role of public regulation of consumer credit markets. Neo-liberalism is often associated with a minimal role for the state but even within neoliberalism public regulation of consumer credit markets is necessary to achieve public confidence in credit markets and achieve fairness. Public regulation may take a variety of forms. In the US in response to the financial crisis the US government has proposed a “Consumer Financial Protection Agency” intended to ensure the safety of consumer credit through greater ex ante control of credit. A variation on this model already exists in the UK and we examine the emerging role of the UK Financial Services Authority in regulating sub-prime lending and payment protection insurance through its “Treating Customers Fairly” initiative