Banking and Finance Law Daily Wrap Up, STRATEGIC PERSPECTIVES—The role of competitive disclosure in preventing the abuse of financial consumers, (Dec 6, 2013)

Corporate efforts to create products and marketing strategies that appeal to consumers have resulted in a marketplace in which a variety of unnecessary and sometimes even harmful products compete for the attention of a population struggling to make ends meet. In some instances, these products are tangible consumption items. In others, they are the financial vehicles such as short-term loans, private student loans, and mortgage loans that facilitate consumption.

The traditional view of corporate law asserts that the corporation serves society through its satisfaction of consumers' revealed preferences, which in turn dictate the most efficient allocation of resources contributed by corporate investors, workers, and managers.

However, in this article, Theresa A. Gabaldon, the Lyle T. Alverson Professor of Law at The George Washington University Law School, takes the position that financial consumers cannot be expected to be rational in the strict economic sense. In light of the complexity and proliferation of various financial goods and services, as well as limits on individual time and cognitive ability, consumers inevitably take shortcuts in making decisions.

The author attempts to explain why the creation of the Consumer Financial Protection Bureau provides an opportunity to revisit the characterization of consumer rationality as a problem purely extrinsic to corporate law. She proposes asking corporate directors to familiarize themselves with the consumer financial offerings of the firms for which they act and express truthful opinions as to the advisability of those offerings for consumers in particular straits. The platform on which this would operate would be a best-practice certification sponsored by the CFPB.

This article, “The Role of Competitive Disclosure in Preventing the Abuse of Financial Consumers,” was originally published in the November 2013 issue of Banking & Financial Services Policy Report.

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