New Consideration on a Consumer Financial Protection Agency

The idea for a Consumer Financial Protection Agency is basically to consolidate all rules and roles for guarding against financial product abuse into one place. But the proposed CFPA would not only take over the role of protecting consumers from all other agencies, including the Fed; it would also be given expansive new powers for regulating the financial sector. Nearly every financial industry group has lined up in opposition. Critics point to the proposal that CFPA would have the power to design very simple, very limited “plain vanilla” versions of financial products and force firms to offer them in addition to their self-designed products. The CFPA would also have the power to ban certain products and require that firms offer the CFPA’s “safer” alternative alone, bothering many opponents of the plan.

A paper by Adam Levitin for PEW suggests that there might be a nuanced take on the the CFPA that would get around this criticism. Levitin argues that the “basic thrust” of the CFPA is to consolidate the many rules out there regarding consumer protection and that the expanded powers part might be unnecessary. His idea is to have two debates: first, is the consolidation of responsibility to one agency a good idea? And second, should this consolidation agency have expanded powers?

Now, it is true that the current structure has fractured consumer protection between these agencies: OCC, OTS, NCUA, the Fed, FDIC, FHFA, HUD, VA, FTC, and DOJ. Levitin writes that authority is sometimes given over a class of institutions, and other times it is over a particular type of product. He lists four main “structural criticisms” of this paradigm:

  1. consumer protection falls between the cracks because no one agency or set of eyes is looking out for the macro-picture of consumer protection;
  2. consumer protection conflicts with, and is subordinated to, overall market safety-and-soundness concerns;
  3. none of the regulating agencies have developed an expertise in consumer protection in financial services; and
  4. regulatory arbitrage in the current system fuels a regulatory race-to-the-bottom.

Levitin would like to see a CFPA without teeth that solved these problems and leave the expanded powers for another debate. But I’m not so sure that all of these are problems. Specifically #2.

There is no doubt that there have been some consumer related problems. The anecdotes are plentiful. Of course, many of the supposed problems missed by the regulating agencies could just as easily be attributed to consumer stupidity or lack of personal responsibility (though that is another topic). The point is that the current system, admittedly, isn’t perfect. To that end, and to solve problem #1, Congress might develop some kind of uniform set of standards that the different agencies could follow to make sure everyone was on the same page with their approach to consumer protection. It doesn’t have to just pull everyone into one house, especially because that creates a whole set of problems on its own.

This is where the second issue comes in, and its one of the biggest reasons that I don’t want a CFPA. I don’t think that safety-and-soundness concerns should be separated from consumer protection concerns. For all of his missteps, Fed Chairman Bernanke is right in his assetion that banking regulation and consumer protection regulation are complementary activities, with one informing the other. Balance is important, and an understanding of the meta picture (as much as any one regulator can understand) is helpful to avoid brash decisions one way or another.

The problem is that consumer protection decisions made in a vacuum could distort market activity and harm business profitability. The CARD Act is an example of a set of regulations being passed with the consumer in mind, but business practices being ignored. The result is a law that is actually hurting consumers, particularly low-income families and some small businesses. The correlary is true as well, that banking regulations made without consumer protection in mind could create problems as well. For these reasons I think strengthening the consumer protection network among the various agencies would be a better approach than the creation of a new agency—even if it didn’t have expanded powers.