In the past, regulatory frameworks for licensed financial institutions (LFI), whether banks, credit unions, insurance companies, securities, etc., had focused primarily on prudential matters, profitability of business models and financial stability. The public interest in regulating was to protect consumer deposits / funds held and used by such financial entities to advance their business activities and interests. Attention by regulators would focus on lending / credit facilities offered by LFIs from the perspective of potential risks to the soundness of the LFIs; not necessarily from the perspective of protecting consumers from aggressive sales practices and irresponsible lending practices.
With the ability of regulated financials institutions to expand credit into subprime markets, we also witnessed the growth of non-regulated lending entities and Fin Techs in providing retail financial services. With the advent of and mass public access to the internet; with the sophistication of risk modeling, with the growth of data collection and analysis, unregulated companies had the tools to deal directly with consumers and offer financial services such as retail mortgages, unsecured debt products and credit facilities in a cost effective and efficient manner without limitation of physical retail locations or effective regulations on their business practices.
Governments tended to ignore this expanding part of the financial sector and its lending practices, perhaps the belief was if a lender went insolvent, wholesale investors suffered the losses, and average consumers would be unaffected.
From 2005 onwards, independent research and studies began to demonstrate the impact of abusive and irresponsible lending practices by the expanding payday loan business on vulnerable segments of society. Governments responded over time with regulations and oversight, but the rest of the unregulated lending sector seemed to be given a free reign in how they did business.
We then were hit with the financial crisis from 2008 and onwards, an event that was (in summary) caused by unfettered retail mortgage lending practices in the USA by both supposedly regulated LFIs and non-regulated entities. Coming out of the crisis, several countries moved to improving regulations and licensing lenders such the UK and Australia, among others. The crisis clearly exposed the depth of impact that irresponsible credit lending had with trillion of dollars of losses with huge impacts on consumers and investors and of course the devastating damages and losses in the world economies.
