Forging Legitimizing Coalitions: Comparing EU and U.S. Financial Consumer Protection Reforms

March 19, 2014

How can we explain instances of financial reform in the EU and the U.S. after the sub-prime crisis starting in 2008 that run counter the interests of the financial industry lobby? How was regulatory capture avoided? How do insiders characterize the unprecedented Dodd-Frank legislation, and how does one even define consumer financial protection? These questions were the topic of a seminar by Lisa Kastner, DAAD/AGI Research Fellow, on March 18, 2014. Her presentation follows lengthy and in-depth research and interviews with observers and insiders of post-financial crisis reform, be they industry, government, or consumer protection advocates. Important factors and concerns for the future were brought up in the presentation and the discussion that followed.

One of the factors which makes it incredible that any sort of real consumer protection legislation was passed or permanent regulatory body created (particularly the Credit Card Act of 2009 and the Dodd-Frank Titles XIV and X, which decreed the creation of the Consumer Financial Protection Bureau, CFPB) is the sheer number of banking and financial lobbyists in Washington when compared to consumer protection advocates. Indeed, the former outnumber the latter twenty to one in lobbyist representation.  However, it is clear that consumer advocates had greater influence in the passing of financial consumer protection reform than pure proportionality would allow.

The crisis altered the context for financial reforms. In normal circumstances these sorts of reforms occur with low public visibility, behind closed doors; expertise is provided by financial experts and therefore regulatory outcome reflects capture by the interests of “big finance.” But there was more public salience after the crisis. In other words, increased media coverage and public investment in the issue made it so that consumer financial protection reform was pushed out of the realm of “quiet politics” and into the realm of “noisy politics.” There was a redistribution of political leverage from the producers to the consumers. Because of this, many in the industry felt cut out of the negotiations of Dodd-Frank in the U.S. and the several reforms in the EU. Being a banking lobbyist was not as glamorous as it once was. “Immediately, if you say you are representing a bank, you are dead . . .” remarked one EU industry lobbyist.

Another factor that made it difficult for industry lobbyists to dismantle or weaken Dodd-Frank specifically was the massive size of the bill. This perhaps helped to conceal the consumer protection aspects from the banks’ dedicated scrutiny. Thus, the primary factor that led to consumer financial protection reform, even despite industry preferences, was the formation of legitimizing coalitions among policymakers and consumer advocates in times of crisis, which enabled “weak” consumer groups to become powerful advocates for regulatory change.

The discussion brought up such questions as “Is Dodd-Frank so wordy that it inherently leaves loopholes?” and “What is a protected consumer?” Ms. Kastner postulates that the guiding principles of consumer protection must be transparency, choice, redress, privacy, and access to financial education. What the ongoing Transatlantic Trade and Investment Partnership (TTIP) negotiations mean for consumer protection was brought up. Putting consumer standards on TTIP would require some harmonization of financial regulatory reform across the Atlantic, and harmonization would be the “lowest common denominator,” a consumer advocate suggested. Although some believed that Europe has better consumer protection, it is probably unfair to compare the two, since the financial cultures in the U.S. and the EU are so different.

Contact Ms. Kimberly Frank with any questions at

DATE: Wednesday, March 19, 2014
TIME: 12:00 – 1:30pm
Suite 700
1755 Massachusetts Ave, NW
Washington, DC 20036