Commentators continue to perpetuate the incorrect idea that the past Consumer Financial Protection Bureau’s efforts to cap fees and charges for financial services promote “affordability.”
What would the financial service sector need to look like for this naïve idea to be true?
Financial service firms subject to controls would need to be unable to adjust the quality and level of complementary services such as rewards programs or free checking accounts.
These financial service firms would need to be unable to adjust the price of their other products.
The affected firms would need to be unable to adjust underwriting models to select the level of risk they are comfortable operating with.
The affected firms would need to be unable to change their focus from one type of customer to another, for example, from consumer credit to commercial loans.
The investors in financial firms would need to be unable to withdraw their capital from affected firms and invest in something else, such as AI or Argentina.
None of these conditions holds. When regulators put price controls on financial services, whether these are fee caps, interest rate limits, or limits on price increases, consumers are harmed: services are cut, other prices rise, and access to services is reduced. These effects hit low-income consumers hardest.
Would we want a world in which the conditions set out above held? Suppose that law and regulation were so comprehensive that each aspect of offering financial services set out above was addressed by a rule. Or, alternatively, conduct not explicitly permitted would be presumed to be forbidden until regulators are satisfied it does not present a risk, as with Europe’s precautionary principle.
In this world, new service offerings or changes to existing services would be barred or delayed. Each firm’s offerings would look much like every other firm’s offerings. Key decisions within financial service firms, instead of being made by executives accountable to investors with their own money on the line, would be made by officials funded by taxpayers. This would be a world of limited opportunity, flexibility, differentiation, and experimentation—ultimately, a world of limited innovation and growth.
And in this world, a change of political regime or top-down policy shift could upend private finance as well as public finance. A step closer to totalitarianism. We should reject anything resembling such a world.
Price controls do not work, and that is a good thing.