Consumer Protections Can Serve To Safeguard Accounts, Investors From Malpractice

Trillions of dollars are floating around the financial world at any given time. Money is often tied up in instruments and deals that only a handful of people can understand. This is especially true with the rise of online brokerage accounts, mobile apps, and desktop applications.

As a result, there's an incentive for people to cheat and defraud investors. Federal consumer watchdogs, along with state agencies and private groups, help ensure that the financial world runs smoothly and its investors are protected from the unscrupulous.

Consumer Protection And The SEC

Obviously, investing in companies requires a certain degree of trust. That's why the Securities Exchange Commission forces companies to reveal a considerable amount of information. Companies must regularly file profit/loss statements and earnings reports. These companies also have to keep an accurate accounting, perform what they advertise to shareholders, and their purchases of shares must be able to clear with relative ease.

Those who work in the commercial investing world must play by a strict set of rules. This is so that they don't have an unfair advantage over other investors. They can't trade using information that's not publicly available. They can't engage in schemes where they swoop in, drive up the price of a stock, and then sell all their shares and cause a stock to crater - what’s called a "pump and dump" scam.

Related scams, as well as insider trading and improper accounting practices, are all prosecuted as fraud by the SEC. The convicted may face prison time and the loss of the privilege to trade investments for years or decades.

Protection And Financial Planning

Consumer protection also helps with individual consultations. Federal guidelines help protect individuals who talk to all kinds of financial planners, such as those who advise Roth IRAs and 401(k) accounts.

They can't recommend investments to people who are not at all suited for those investments. For example, some forms of investment involve leveraging in order to maximize both profits and risks. Other investment approaches have massive fees and high minimums to stay invested.

Financial planners can't steer low-income investors into those risky, top-tier investment vehicles. Financial planners may not spend any money that wasn't specifically authorized by the client for a particular investment.

For aspiring fiduciaries, there are even more requirements. Fiduciaries have to act completely outside their own interests and reject commissions to sell investments like mutual funds.

Conclusion

Consumer protections extend past stocks and financial planning to individual brokerage and bank accounts. The Federal Deposit Insurance Corporation protects checking and savings accounts while the Federal Reserve ensures that banks meet capital requirements.

Consumer protection curbs society’s bad actors who would severely hamper the financial markets.