Five Effective Ways to Resolve Omnipresent Financial Disputes

Jin Yoo

― Abstract―

These days, disputes between financial consumers and financial institutions arise in various situations in various nations, including those between Goldman Sachs and its investors in the US or those between various financial institutions and their customers in Korea. These disputes could make financial consumers suffer financial distress and even go bankrupt. Besides, these disputes, which are often terminated finally in civil or criminal court, take lots of time, energy, and economic resources from both parties involved so the welfare of the whole socio-economy decreases greatly. Furthermore, since the winners of such disputes in court are usually financial institutions which have more information and more money, they rarely try sincerely to correct themselves even if their maltreatment of consumers is the source of the disputes. Because of these potentially-devastating outcomes, the financial authorities in most countries are keen on preventing such disputes ex ante and resolving them ex post. To serve the purposes, however, the very nature of such disputes should be understood first, and then, some effective ways out of them should be discovered. Using a theoretical model, we first examine the fundamental causes for the disputes in terms of existing financial theories, risk-return incentives for financial institutions and consumers, and their behavioral traits. Also, largely based on the model, we suggest five effective ways to prevent and resolve the disputes, which are i) education of misselling and bounded rationality, ii) advising by experts like IFAs in the UK, iii) opt-out policy, iv) periodic settlement with premature closing out, and v) early diagnosis.

Keywords : Independent Financial Advisor (IFA), Opt-Out Policy, Financial Dispute, Misselling, Bounded Rationality

JEL Classification Number : G28