Financial Stability Regulation as Indirect Investor/Consumer Protection Regulation: Implications for Regulatory Mandates and Structure

Abstract

An investor who purchases shares in a corporation, at a price that has been inflated by misleading information, suffers when the truth comes to light and the share price falls. A consumer seeking financing to buy a home suffers if a lender misleads the consumer about the cost and features of a mortgage that the consumer subsequently obtains. In the United States, investor protection regulations, as administered by the Securities and Exchange Commission (“SEC”), aim to address the first scenario by providing remedies for fraud in connection with the purchase or sale of a security. To address the latter scenario, a slew of federal consumer protection legislation exists that seeks to protect the consumer from unfair, deceptive, abusive and discriminatory practices. Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), these consumer protection statutes have largely been administered by the Consumer Financial Protection Bureau (“CFPB”). In both of these examples, the primary focus is on the harm that individual investors and consumers can suffer at the hands of unscrupulous actors. However, both investors and consumers are – collectively – hurt more by the economic disruptions that follow a financial crisis than they are from individual instances of misconduct. Despite this, a shared characteristic of the SEC and CFPB is that both agencies typically discharge their protector functions from a direct perspective. Unfortunately, such an approach neglects the indirect harm that consumers and investors suffer as a result of financial instability. That is not to say that the SEC and the CFPB are currently discharging their functions in identical ways: there are certainly striking differences in culture and approach that are evident when we compare the agencies, and when we compare investor- and consumer-targeted laws more generally. A more detailed analysis of such distinctions, and the design and purpose of the SEC and CFPB, can be found in the other contributions to this Symposium. The aim of this Article, however, is to illustrate the depth of harm that can befall both investors and consumers in the aftermath of a financial crisis, and in doing so, make the case that financial stability regulation – which aims to prevent such crises – should be conceptualized as a vitally important, albeit indirect, form of consumer protection and investor protection regulation.