Performance-Based Consumer Law

When firm and consumer interests are not well-aligned, the resulting transactions are often lousy, whether one uses consumer autonomy or consumer welfare as the metric. With modern experimental and data analysis techniques, firms can run circles around the law’s current disclosure and design rules, yet regulators today are tied to slow, circumscribed responses. What should be added is a regulatory instrument that does three things. First, it should unite the interests of firms with the goals of regulators through performance standards for consumer comprehension and/or suitable consumer product use, thereby redirecting the creative potential of the private sector much as emissions standards do for pollution reduction. Second, the instrument should ground the law on actual consumer knowledge and behavior, rather than hypothesized conceptions of the “reasonable” consumer. Third, it should institutionalize a monitoring system that provides feedback used to improve both the marketplace and regulation in a virtuous cycle. This Article suggests a fresh approach to consumer law, one that has been tried piecemeal in consumer regulation, but until now without a fulsome intellectual foundation. Its aims are both modest – to bring consumer transactions in line with consumer expectations – and ambitious – to make the law as agile as firms. Performance-based consumer law has the potential to incentivize firms to educate rather than obfuscate, develop product designs that align with rather than defy consumer expectations, and channel consumers to products that are suitable for the consumers’ circumstances. Moreover, even if performance-based regulation does not directly lead to dramatic gains in consumer comprehension or marked declines in unsuitable uses of consumer products, the process of establishing and implementing such regulation promises dividends for improving traditional forms of regulation. The article is particularly timely in at least three respects. First, it answers the question implicitly asked by recent critiques of mandated disclosure: what should we do instead? Second, it plots a course for the young Consumer Financial Protection Bureau that has great potential to improve the consumer marketplace and is plainly authorized by the Dodd-Frank Act. Third, the policy structure it proposes would be helpful in a host of areas where policymakers are currently at a loss for what to do, including personal data privacy, payday lending, overdraft, and consumer drug marketing. Performance-based consumer law is more than a technocratic exercise. It is based on and in operation would re-inscribe a normative vision of consumer law that places consumers at the center.