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A technical error made by the Consumer Financial Protection Bureau has become a saving grace for lenders who had pushed, begged and pleaded for more time to comply with a new mortgage disclosure rule.
June 18 -
The growing popularity of impact investing has led to a raft of new disclosure rules. The problem is that using the SEC to monitor companies' CEO pay policies and use of "conflict minerals" decouples the government agency's authority from its area of jurisdiction.
June 24 -
A new study by a consumer group found that checking account disclosures at the nation's largest banks have improved, but overdraft fee practices are largely unchanged from previous years.
May 12 -
The Basel Committee's revisions to banks' risk disclosure requirements should help investors glean more meaningful information, thereby allowing them to impose market discipline on less creditworthy institutions.
January 29
The question of whether investment brokers should be subject to a
Disclosures are frequently proposed as a
Disclosure requirements also have bipartisan appeal because they try to address biases but involve minimal regulation. Some members of the industry also support the idea, which is relatively inexpensive to implement and generally involves less disruption of the status quo.
But disclosure is not a panacea. It can have unintended and even perverse consequences, potentially exacerbating bias among brokers and harming the customers it ostensibly intends to protect.
Consider the results of a 2005
Paradoxically, when advisors disclosed their upwardly biased rewards, the accuracy of estimates went down, not up the opposite of disclosure's intended effect. Other studies have resulted in a similar outcome, including a
There are several reasons why disclosures can backfire:
#1: Strategic Exaggeration
Research suggests that advisers such as brokers tend to provide more biased advice to counteract anticipated discounting. Economists have dubbed this tendency "strategic exaggeration." For example, in the studies noted above, because of the disclosure, estimators did indeed discount advice more than when disclosure was not made, but not sufficiently to counteract the increased bias in the advice they received. Everyday experience in other industries reinforces the point. It is fairly common, for example, for car sellers to inflate their asking prices initially in anticipation of the buyer haggling downward.
#2: Moral Licensing
Consciously or otherwise, advisors may feel that biased advice is justifiable because the advisee has been warned. Conversely, according to
#3: Increased Trust
This "moral licensing" can be especially insidious because disclosures may paradoxically increase consumer trust. When a broker tells a borrower that they have conflicts, the borrower's trust in the broker may actually increase because, after all, the broker is being honest.
#4: "Not Me" Biases
Fourth, even if customers accept that brokers in the abstract may be skewed by conflicts, many are resistant to the idea that their own brokers would be so biased. A 1998
#5: Checking the Box
Brokers may also undermine disclosures by casting them as a matter-of-fact compliance hurdle. As leading consumer protection advocate Michael Barr
While coming clean can backfire, the question should not be whether to disclose, but how to ensure that disclosure has its intended effects. Disclosure can only be effective if the recipient comprehends how the conflict has influenced the advisor and is empowered to correct for that biasing influence. We ought to better utilize the following tools.
The first is simply encouraging customers to abide by the caveat emptor principle. Customers should know that when conflicts are disclosed, greater vigilance is warranted. Just as patients may seek out second opinions in order to better assess the effect that conflicts of interest have on their doctor's advice, so can everyday investors, small-business borrowers and others benefit from talking to multiple brokers.
Framing is also critical. A standardized disclosure form with side-by-side comparisons of a broker's products by compensation as well as cost and terms would help de-bias information and empower clients to act optimally. A 2007
Lastly, we should go beyond disclosures to require that all brokers respect a fiduciary standard. Customers turn to brokers for individualized advice, whether on loans or investment decisions, and trust their broker to help them evaluate options. It is only fair that brokers should have to act in their best interests.
Taken together, these steps can reduce market frictions that result from information failures, put pressure on brokers to be honest in their dealings with applicants, and foster a better-functioning market.
Brayden McCarthy is head of policy and advocacy at