A Better Way to Enhance Consumer Financial Protection
The curious spectacle of the House-Senate conference committee on financial reform got underway in earnest yesterday on Capitol Hill (opening statements were delivered last Thursday). Over six day-long sessions, ending next Saturday, June 26th, the 31 designated members of the House of Representatives and 12 designated Senators will hash through nearly 2,000 pages of base legislative text, title by title.
Next Tuesday, June 22nd, conferees will take up one of the most contentious aspects of the reform legislation – how to best protect the rights and interests of consumers of financial products and services. The bill passed by the House – with no Republican support – would create a free-standing and independent Consumer Financial Protection Agency (CFPA). The Senate bill – passed with just three Republican votes – would create a Consumer Financial Protection Bureau housed within, but independent from, the Federal Reserve.
The Administration and Congressional Democrats are correct to emphasize enhanced consumer protection as a central aspect of financial reform. Republicans would no doubt agree. The United States cannot have a world-class financial marketplace unless consumers and investors have full confidence in the safety and soundness of financial institutions, the integrity of the markets, the quality and suitability of financial products, and the basic fairness of the broader financial system. And there is no question that the confidence of consumers and investors has been profoundly shaken. Enhancement of consumer and investor protection must be part of any meaningful policy response to the recent crisis.
But a single consolidated agency – whether a free-standing CFPA or a CFPB embedded within the Fed – is unlikely to effectively serve the purpose for which it has been proposed. Indeed, there are good reasons to conclude that such an agency – by its very nature – would actually undermine consumers’ interests:
- Centralizing consumer protection within a single agency would monopolize the approach to the highly varied range of consumer protection issues – one agency, one staff, one institutional outlook and posture. The focus and expertise of the banking, securities, and insurance functional regulators would be lost, to the detriment of consumers’ interests;
- Sequestering consumer protection within a new agency would bifurcate the regulation of financial products from the regulation of the institutions developing and marketing those products, opening an unnatural and potentially dangerous gap between consumer protection and the assessment of overall safety and soundness;
- A single agency would create a “single point of failure” dilemma. With only one cop on the beat, problems are missed.
- A single agency would also create an easy excuse for the other functional regulators – “consumer protection is not my job;” and,
- It’s easy to imagine how a new Washington-based bureaucracy could stifle the creativity and innovation that is the foundation of the U.S. financial sector’s international competitiveness, and upon which consumers rely.
The Administration has made clear that a major conceptual priority of its approach to financial reform and modernization is regulatory accountability. In the wake of the recent financial crisis, this emphasis is to be applauded.
But the Administration is also of the view that centralizing regulatory authority is necessary to ensure that clear accountability. As Secretary Geithner has stated regarding the CFPA: “By consolidating accountability in one place, we will reduce gaps in federal supervision and enforcement.”
Without question, greater accountability is an essential aspect of meaningful reform. But it need not – and should not – be accomplished in a way that also produces unnecessary and potentially problematic concentrations of power, or other unintended consequences of the sort briefly described above.
If consumer protection is so important to the credibility and competitive position of our capital marketplace – and it is – it should be embedded within the DNA of each financial regulator, not isolated within the walls of a new monolithic agency.
With this reality in mind, a better alternative to the proposed CFPA or CFPB would be to create by statute an Office of Consumer Protection and Education within each functional regulator (OCC, FDIC, SEC, CFTC, FHFA, and Federal Reserve). Each office would be presided over by a Director, to ensure pinpoint accountability within each agency. The offices and their Directors would be charged with policing consumer protection issues within that agency’s purview – thereby preserving the benefits of sectoral specialization and expertise – and advancing and coordinating that agency’s financial education efforts. Finally, to ensure the relevance and maximize the effectiveness of the created offices, each Director should report directly to the head of his or her respective agency.
In addition, Congress should create by statute a Council of the Directors of the various Offices of Consumer Protection and Education, which would meet quarterly to share information and observations, and promote cooperation and the harmonization of standards.
To further ensure accountability, the Council of Directors should be required to report on a regular basis – perhaps annually – to the relevant Congressional committees regarding consumer protection and financial education issues, areas for potential cooperation and coordination, and any difficulties encountered within their respective agencies.
By way of this approach, consumer protection and education would be dramatically enhanced and accountability ensured – objectives the Administration and Congressional Democrats have wisely prioritized – while avoiding the drawbacks and unintended consequences associated with regulatory monopoly and concentrated power.