Last week, Representative Barney Frank, Chairman of the House Financial Services Committee, made a push to scale back the proposal for the Consumer Financial Protection Agency (CFPA), part of a financial regulatory reform bill, which is expected to be voted on by the end of the year. Some of the paring down of the CPFA includes the elimination of the requirement for financial firms to offer plain “vanilla” products and services, such as mortgages with simple terms and credit cards with easy to understand contracts. Additionally, in the memo that was circulated by Rep. Frank, outlining the modifications he envisions with respect to the CFPA, it was noted that, “ the CFPA will not have authority to approve or change business plans” for financial institutions. As one would imagine, plans for the CFPA have been amended in order to assuage industry concerns about its restrictiveness and to appease legislators whose support is needed if the full bill is to pass through Congress.
This is par for the course in Washington, and we’ve all seen how much the healthcare bill has shifted over the past few months. However, the CFPA has been doomed from the start because it is disjointed at its core, and no amount of amendments or adjustments will fix the problems that are inherent to this new regulatory agency. The CFPA won’t work because its basis is the idea that consumer protection can be separated from the oversight of the soundness of the financial institutions themselves. Thus, while Congress and the Obama administration have been spot on in their diagnosis of the problems that plague America’s financial regulatory system, embracing the CFPA as a solution will not help the industry nor will it protect consumers.
My solution is, instead, to provide greater consumer advocacy by simplifying the system. Specifically, I believe that each individual financial product ought to have its own regulatory body. For example, the credit card business units of all the financial institutions in the country will be supervised by the same dedicated credit card regulatory agency that will not only be responsible for the financial health of these business units, but also for fair practices, consumer protection, transparency and simplicity in the credit card industry. Similar individualized regulation should be put in place for mortgages, car loans and so on. Most importantly, my solution takes full advantage of the natural interdependency of consumer financial protection and the supervision that a financial institution requires in order to ensure that it is on stable footing.
Additionally, it is important we do not forget that one of the main contributors to the financial crisis was a regulatory system that was unable to provide the right amount of oversight to our financial institutions. The CFPA does nothing to address this shortcoming, and will actually make things worse by adding another regulatory agency into the mix, which will have to co-ordinate with all the existing regulators – and there are a lot – just as an example there are six different agencies for the credit card industry.
Unlike the CFPA, my proposed solution would significantly improve the regulatory oversight that financial institutions get, given that they would no longer be able to pick their own regulators, and that business units of banks will get the right amount of oversight regardless of how large and cumbersome the financial institutions that they belong to are. For instance, under my structure no single regulator would have to sort through Citibank’s complex and unmanageable corporate structure to uncover risks that might span from risky credit cards to risky mortgages. Instead there would be one regulator that oversaw Citibank’s credit card business unit, taking responsibility for both consumer protection and the financial soundness of that particular business unit. Another regulator like this for Citibank mortgages, another for student loans, and so on. The sum total of having all of Citibank’s business units healthy and comprehensively reviewed by regulators with deep expertise in their respective areas, would certainly have created a Citibank that did not require $45 billion of taxpayer money in order to survive.
Going back to consumer protection, the key question to ask ourselves is – who understands best how to protect a consumer against questionable credit card practices: a general financial agency for consumer protection or a dedicated credit card agency that is responsible for all regulation related to credit cards? The latter, quite obviously. Only an institution that specializes in holistically regulating credit cards has the deep understanding that is required to proactively identify questionable practices, and to mitigate sources of consumer complaints and confusion without endangering the financial health of the respective financial institutions. Finally, a single agency responsible for regulating just one financial product means fewer eggs in more baskets. This way, accountability is more easily achieved. If something goes wrong, it isn’t complicated for consumers to understand who is to be held responsible, nor is it a mystery for politicians or the press.
In the end, we cannot afford to have the regulatory system we have now because of its inefficiencies. We need change. Throwing another agency into the mix, however, doesn’t solve the problems we have concerning jurisdiction that overlaps, lack of clear accountability and the blind spots that are caused by our current method of divvying up financial regulation. Perhaps the worse thing in all of this is that the new proposal for the CFPA suggests that Congress recognizes a lot of the above issues, but they continue to keep the idea of the CFPA alive because it is seen as a sign that they both care about consumer protection and are willing to cooperate with the Obama administration.
American taxpayers would be better served if Congress were to undertake the hard work of reforming our regulatory system in a way that would result in both consumers and financial institutions being better protected, rather than constructing another agency that has consumer protection in its name but that is inherently doomed to fail because of its foundational deficiencies.