Consumer Financial Protection Agency

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CFPA signed into law

Barack Obama today signed into law the most sweeping financial-system overhaul in the US since the Great Depression, putting the country on a course toward a more muscular regulatory framework.

The law - the Wall Street Reform and Consumer Protection Act - gives the government authority to take over and liquidate failing financial firms, injects transparency into transactions involving financial instruments called derivatives and will restrict banks from making risky bets with their own capital. It directs agencies to write hundreds of new rules.

But one provision that barely survived the bruising debate on Capitol Hill will have the most direct bearing on millions of ordinary people's lives: a new agency meant to protect consumers from abusive financial products, called the Bureau of Consumer Financial Protection.

The proposal was the source of some of the most intense debates in the long struggle over the financial-regulatory overhaul, and the battles are far from over.

The biggest to loom is over who will head the agency, and that heated up this week as liberal groups insisted the White House give the job to Elizabeth Warren of Harvard Law School, whose idea the agency was. Banking groups were urging key senators to oppose Ms Warren, calling her an activist who would impose policies they argue would hurt the availability of credit, especially for those with low incomes.

With Democratic leaders in Congress joining liberal consumer groups and unions in pushing for Ms Warren - and with many Republicans opposed - the contest is shaping up to have the intensity and drama of a Supreme Court nomination. Senate confirmation is needed.

Mr Obama's choice, expected soon, will be a momentous one because the first director will have great influence over the agency's direction, wielding an annual budget of about $US500 million ($570m) that doesn't require approval from Congress.

The new consumer regulator will be funded by the Federal Reserve and have independent powers to write and enforce rules governing how loans and other financial products are offered, bearing on everything from the type of mortgages people can get to the fees on their credit cards.

The agency will be able to enforce its rules against any bank with more than $US10 billion of assets, as well as all large mortgage lenders, student-loan companies and payday-loan firms. It will have an army of examiners to probe these companies’ practices. Small banks will have to follow the new rules written by the agency but they will be examined by other federal regulators.

The bureau's policies and rules could be overturned by other regulators only if they “would put the safety and soundness of the US banking system or the stability of the financial system of the US at risk”.

Senate efforts for the CFPA

Shelby may propose independent CFPA

"Staff members for Sen. Richard C. Shelby (Ala.), the ranking Republican on the Senate banking committee, sent a proposal to their Democratic counterparts last week that would create an independent consumer financial protection agency, according to sources familiar with the negotiations.

The offer marks a significant reversal from the position that Shelby and other Republicans have long held: that such an agency would clash with a separate set of regulators charged with overseeing the health of financial firms. The proposal includes limits on the consumer agency's authority, including a commission of regulators that could serve as a check on rules put forth by the agency, according to one source. The sources spoke on the condition of anonymity because they were not authorized to discuss the matter publicly.

It is unclear what other concessions Shelby might be seeking in return for his support of a new consumer agency, and aides to Shelby and committee Chairman Christopher J. Dodd (D-Conn.) declined to speak in detail about the ongoing discussions..."

OCC now supports CFPA

After months of criticizing the Obama administration's proposal to create a consumer-focused agency dedicated to protecting borrowers from abusive lenders, the nation's top big-bank regulator has reversed course.

The regulator, the Office of the Comptroller of the Currency, now supports an independent consumer agency -- finding itself on the opposite side of the issue from an industry it polices and powerful lawmakers it answers to, who are firmly committed to killing the proposed agency.

The OCC's position has "evolved over time" and they are now "very much in favor of" the proposal, deputy comptroller for public affairs Robert M. Garsson told the Huffington Post on Tuesday. Garsson sent an email on Wednesday afternoon, stressing that "we've always supported having a strong rulewriting agency to write consumer protection rules."

250 groups unite to fight for independent CFPA

"A coalition of labor unions, civil rights activists and consumer groups met Treasury Secretary Timothy Geithner and senior White House adviser Valerie Jarrett yesterday to discuss joining forces to push for an independent consumer financial agency, said Travis Plunkett, the Consumer Federation of America’s legislative director.

The authority of the consumer agency is a sticking point in Senate negotiations over President Barack Obama’s proposal to overhaul financial regulation. The consumer coalition wants a stand-alone agency with the power to write and enforce rules covering mortgages, credit cards and other financial products, without having to obtain approval from other bank regulators, said Plunkett.

The House passed a measure in December that would create such a free-standing agency. The Senate is moving toward a unit that would be tucked inside another agency, possibly the Federal Reserve, with narrower rule-making and enforcement authority.

The group may have to decide between throwing its support behind a bill it considers weak, or supporting no bill at all, said Representative Brad Miller, a North Carolina Democrat who is an ally of the coalition.

Dodd may give consumer power to Fed

"Sens. Chris Dodd (D-Conn.) and Bob Corker (R-Tenn.) are in talks about creating a new consumer financial protection office in the Federal Reserve to attempt to overcome partisan gridlock that is holding up a wide-ranging financial overhaul plan.

Several sources familiar with the talks said the two senators have not yet inked a final deal and that they are still working through final language.

"Dodd is keeping members informed on how things are progressing. We do not have an agreement yet. He hopes to have a consensus bill in the coming days," said Kirstin Brost, spokeswoman for Dodd, chairman of the Senate Banking Committee.

The discussions come lawmakers continued to heavily criticize the Fed for regulatory lapses in the run-up to the financial crisis.

It's unclear if such a proposal would garner broad support from Democrats and Republicans, but it could represent a breakthrough on the thorniest aspect of the overhaul plan.

President Barack Obama proposed a standalone Consumer Financial Protection Agency (CFPA) to regulate home loans and credit cards, but Republicans and some moderate Democrats have been opposed to the proposal. The House passed legislation in December in support of a standalone CFPA, but action in the Senate has been bogged down since the middle of last year. The financial industry has lobbied heavily against the idea.

Consumer advocacy organizations have been pressing lawmakers to craft a strong independent consumer agency. They opposed an earlier proposal to create a consumer protection bureau at the Treasury Department.

Asked about the possibility of a consumer protection office at the Fed, an administration official said on Monday night: "The President is strongly committed to an effective and independent consumer agency, with real accountability for setting and enforcing clear rules of the road in the financial services marketplace."

Warren argues for independent agency

"...But "there's a lot of enthusiasm for a strong bill," Warren said. "The senators really get the main point -- either vote on something that's strong or don't do it."

The dispute, after all, is a simple one, Warren said: "It's between families and banks."

"The lobbyists would like nothing better than for the story to be the [proposed] agency has died and everyone has given up," Warren said. "The lobbyists' closest friends in the Senate would like nothing better than passing an agency that has a good name but no real impact so they have something good to say to the voters -- and something even better to say to the lobbyists."

Warren said the new agency should have four simple attributes:

  • A chief appointed by the president, confirmed by the Senate;
  • Independent budget authority, so it won't be subject to the whims of Congress or an anti-consumer administration;
  • Independent rule-making authority, without interference by bank regulators or others who may focus on bank profitability before focusing on consumers;
  • And independent enforcement powers, so the agency's investigators can go after abusive lenders.

"Those are the basic elements of an independent agency," Warren said. "It's not as if there's some fifth thing that was left off that list -- that is the list."

The House passed a bill in December calling for the creation of such an agency.

"It's a muscular agency, and that's what really matters," Warren said. House Financial Services Committee Chairman Barney Frank (D-Mass.) led the fight.

"It's not perfect -- there's no excuse for excluding used car dealers -- but it's strong," she said. "The agency that passed the House will get the job done."

Dodd, who has been under fire for the level of his commitment to a muscular new agency, reiterated his support during a Tuesday evening interview on "Hardball with Chris Matthews" on MSNBC.

"What`s really important are four points that I have been insisting upon from the very beginning," Dodd said according to a transcript of his remarks. "One, I want a presidentially- appointed director of this operation. I want it confirmed by the Senate. I want a separate funding source. And I want it to have rule-making authority and enforcement authority.

"I'm going to insist upon those four points, wherever this is located," he said.

Warren agreed with those points.

"I read his Hardball transcript and I thought: I could entirely envision Elizabeth Warren sitting there saying the same thing," Warren said..."

FDIC Chair argues for independent agency

Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC), is urging lawmakers to set up an independent consumer financial protection agency.

Andrew Gray, spokesman at the FDIC, said in a statement to The Hill on Monday that an agency should be independent and have significant rule-writing power.

"Consumer abuses were one of the root causes of the financial crisis and regulatory reform legislation should address this problem. The FDIC has been on the record that the ideal way to do this is through an independent agency with the power to write rules for the banks and non banks alike," Gray said.

Consumer protection bureau proposed at Treasury Department

"Senate Banking Committee members are considering creating a new bureau for consumer financial protections within the Treasury Department instead of setting up a standalone agency as proposed by President Barack Obama.

The discussions are still highly fluid and subject to committee debate. The new proposal, discussed by Senate Banking Committee Chairman Chris Dodd (D-Conn.) and other panel members, would create a bureau instead of a standalone agency and would set up an appeals process for bank regulators to weigh in on the bureau's rules and decisions, according to a summary of a proposal obtained by The Hill.

It is not clear if the new proposal could gain bipartisan support. Republicans on the banking panel, including Sen. Bob Corker (R-Tenn.), who has been negotiating with Dodd, have raised objections about creating a consumer entity under the Treasury Department.

Republicans prefer placing consumer protection responsibilities with the prudential regulators responsible for the safety and soundness of banks..."

CFPA imperiled by Senate’s bipartisan talks

Republican Senator Bob Corker’s decision to work with Senate Banking Committee Chairman Christopher Dodd may speed passage of a financial overhaul bill at the expense of President Barack Obama’s biggest goal: a standalone Consumer Financial Protection Agency.

Republicans including Corker oppose creating an agency to police credit-card and mortgage lending, the element of Obama’s overhaul plan most opposed by bankers including Jamie Dimon, chief executive officer of JPMorgan Chase & Co. Democrats such as House Financial Services Committee Chairman Barney Frank of Massachusetts said it would protect consumers against abuses that led to the 2007 collapse of the subprime mortgage market.

“Everybody knows that a freestanding agency is a non- starter,” Corker, a Tennessee Republican, said yesterday in a telephone interview after announcing he would work with Dodd.

Disagreement over the consumer agency contributed to the collapse of talks between Dodd, a Connecticut Democrat, and Alabama Senator Richard Shelby, the banking panel’s top Republican, Shelby said on Feb. 5. Obama, who has chided the banking industry for opposing the agency, lobbied Dodd to push for the independent regulator in a meeting last month, a White House official said at the time on condition of anonymity.

“CFPA is a political hot potato regardless of which party is taking the lead,” Camden Fine, the president of the Independent Community Bankers of America, a Washington-based group representing small banks, said in a telephone interview. “I doubt very seriously whether CFPA will survive as a standalone.”

Elements of the agency may still survive as a Treasury Department unit. Another option would be to set it up as part of a bank regulatory agency, an approach favored by Shelby.

CFPA inside existing agency in discussion

"... Ultimately, agreement between Dodd and Shelby is the only obvious route to a bipartisan deal. In recent days, according to Senate sources, they have been discussing alternatives to an independent agency as part of an overall compromise.

Dodd, according to the sources, is willing to consider a consumer protection office under a presidential appointee within an existing agency. He also wants consumer protection to have a dedicated source of funding to better insulate it from budget pressures, with regulators empowered to write and enforce new rules on non-bank institutions such as mortgage brokers..."

BofA withdraws opposition to CFPA

Bank of America Corp., the nation’s largest bank, vowed that it won’t oppose President Barack Obama’s plan to create the Consumer Financial Protection Agency.

Chief Executive Officer Brian Moynihan informed White House and U.S. Treasury Department officials of the company’s stance last month, bank spokesman James Mahoney said today in an interview. While not endorsing the agency, the Charlotte, North Carolina-based bank agrees with the “policy direction,” Mahoney said.

“We’ve made it clear to various organizations of which we are part that we aren’t lobbying against the agency,” Mahoney said. The bank also isn’t promoting the concept, leaving the decision to Congress and U.S. agencies, he said.

The stance may put Moynihan at odds with rival bankers, whose lobbyists have spent millions of dollars to head off the new agency. Moynihan, 50, has sought to improve relations with regulators since taking over on Jan. 1 from Kenneth D. Lewis as CEO. Lewis clashed with U.S. officials about the bank’s $45 billion bailout and its purchase of Merrill Lynch & Co.

Officials at the Treasury who met with Moynihan were pleasantly surprised by the bank’s position, according to a department spokesperson. The Treasury is watching to see if groups that represent the company in Washington also refrain from opposing the new agency, the spokesperson said.

Moynihan wants regulators focused on making products and activities transparent, simple and fair without singling out one type of financial institution, Mahoney said. The bank opposes proposals that would allow state regulators to overrule federal guidelines, a process that would be inefficient for national banks, he said.

Warren fights to establish the CFPA

"The tag on U.S. financial regulation reform may as well say "Made on Wall Street" if bank lobbyists manage to gut the Obama administration's proposed consumer watchdog agency, said Elizabeth Warren on Monday.

The head of a panel monitoring the government's bank bailout program, Warren is a Harvard Law School professor and a fierce critic of the banking industry. She is also rumored to be front-runner to become the first chief of President Barack Obama's proposed U.S. Consumer Financial Protection Agency.

The CFPA would be a new government regulator devoted to shielding Americans from financial rip-offs like the abusive subprime mortgages at the core of the 2008 financial crisis, and the prolonged recession and bank bailouts that followed.

But the proposed agency, already pared back last month in the House of Representatives, is in trouble in the Senate.

Under pressure from big banks fighting hard to kill or weaken it, senators are said to be discussing downgrading the CFPA from an independent agency to something less than that.

Such a move would undermine the integrity of the reform project overall and set up the United States for another cycle of financial predation, crisis and bailout, Warren said.

The Senate will reconvene on Wednesday with analysts expecting agreement in the banking committee on financial regulation reforms within weeks.

"The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants," she told Reuters in an interview.

"The question of who is in control is not going to be revealed by some nuance of how to deal with leverage ratios or credit default swaps clearing," she said.

"It's not that those issues aren't important; they are. But those are skirmishes on the edges of a huge battle over reining in an out-of-control industry. The CFPA has real teeth, and it is the centerpiece of meaningful reform."


The Obama administration last year unveiled a sweeping plan to tighten bank and capital market regulation in response to an international financial crisis triggered by the bursting of a U.S. property price bubble and cascading follow-on effects.

The European Union is also pursuing ambitious changes aimed at preventing another crisis in the future.

Central to U.S. and EU strategies is finding new ways to deal with so-called "too big to fail" financial powerhouses, such as Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America.

So dominant have these firms, and a handful of others, become that old laws governing them no longer work. Writing new ones means tackling the complexities of over-the-counter derivatives, capital standards, leverage ratios and the like.

In the swirl of debate over such esoteric topics, Warren said it is crucial that consumer protection be addressed and that banks, seeking to protect their profit margins, not be allowed to squash changes that would help everyday people.

Consumer protection is relatively simple and could easily be fixed, she said. The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

Setting up the CFPA is largely a matter of stripping the Fed and other agencies of their consumer protection duties and relocating them into a new agency.


The problem is that a strong CFPA directly threatens the banks' ability to sell confusing, deceptive, fee-heavy financial products that generate huge profits, Warren said.

That's why the industry -- for many years the leading source of campaign funds to Washington politicians from both parties -- is so adamant in opposing the CFPA, making it politically dangerous for lawmakers to back it.

Warren said she is skeptical that the CFPA could be effective if it became a division of another agency.

"The industry wrote the rules that permitted them to behave so recklessly. They captured the agencies, which took the cops off the beat. They funneled enormous resources into the political process to make sure there wouldn't be any new cops.

"Then they made hundreds of billions of dollars by selling deceptive products. The sale and resale of those deceptive products crashed the economy. The industry then demanded government bailouts and guarantees," she said.

"Right now we're writing the final chapter in this story. It will show whether we're going back to the first move, letting the industry write the rules again, or whether the crisis actually changed something."

  • Making Credit Safer Oren Bar-Gill and Elizabeth Warren, University of Pennsylvania Law Review, November, 2008

Dodd willing to give up independent CFPA

Senate Banking Committee Chairman Christopher Dodd is considering scrapping the idea of creating a Consumer Financial Protection Agency, people familiar with the matter said, an initiative at the heart of the White House's proposal to revamp financial-sector regulations.

The Connecticut Democrat, who announced this month that he wouldn't run for re-election this year, has discussed the possibility of abandoning the push for a new agency during negotiations with key Senate Republicans as a way to secure a bipartisan deal on the legislation, these people said.

Mr. Dodd's offer is conditional, however: Republicans must agree to create a beefed-up consumer-protection division within another federal agency, these people said.

The apparent willingness to forgo an independent consumer-protection agency would be a major concession for Mr. Dodd, who had blasted the banking industry for lobbying aggressively to prevent the creation of such an entity. "The very people who created the damn mess are the ones now arguing that consumers ought not to be protected," he said in June.

Mr. Dodd's shift comes amid a new sense of urgency to enact revamped rules governing the financial sector in what is now a narrow window before the November election.

Bipartisan support is believed necessary to pass such legislation, as Democrats aren't likely to get the 60 Senate votes needed to overcome a potential Republican filibuster. With Mr. Dodd no longer seeking re-election, some of the pressure to apply a populist stamp on new financial regulations has eased.

Mr. Dodd's openness brings him more in line with the top Republican on the Senate banking panel, Richard Shelby of Alabama, who has referred to the Consumer Financial Protection Agency as a "nanny state."

Many in Washington and on Wall Street believe the chances of Congress reaching an agreement on financial regulations hinges on whether Messrs. Dodd and Shelby can work out a compromise, and staffs have been locked in intense negotiations for weeks.

Representatives of Messrs. Dodd and Shelby wouldn't discuss the state of negotiations, other than to say no agreement has been reached.

Talks could fall apart, and Mr. Dodd could still decide to push for creation of an independent agency.

Dropping the bid for a standalone consumer-protection agency would strip out a central plank of the White House's proposal and could infuriate liberals and consumer groups who have championed the idea. It could also breathe life into an effort to get a compromise on new financial regulations, assuming liberal Democrats don't break ranks.

White House and Treasury Department officials have so far remained committed to creating a standalone agency. "There needs to be a new agency with new powers for whom this will be a primary mission," said White House National Economic Council Director Lawrence Summers.

Republicans liken CFPA to EPA

"Senate Republicans are determined to prevent the creation of an independent Consumer Financial Protection Agency because they consider it as threatening as their current arch-nemesis regulator: the Environmental Protection Agency.

Consumer advocates, meanwhile, say the CFPA must have strong, independent authority to craft and enforce rules. Anything less, they argue, would be too much of a concession to banks that have gotten enough already.

"From the Republican point of view, the idea of a separate agency is still anathema," said Sen. Robert Bennett of Utah, a senior Republican on the banking committee. An independent agency, he said, can go too far in the direction of tight regulation without taking into account the effect of the rules it creates on business and the economy. He said he's seen it happen before.

"Can you say EPA?" he asked, lifting his eyebrows. The Republican Party has regretted for years that President Richard Nixon made the EPA independent.

There's been some movement: Republicans who once pushed for total elimination of the CFPA are now ready to back a compromise solution that would make the CFPA subservient to a larger financial regulatory agency, whose leadership could modify or eliminate any protections deemed hurtful to business.

"That doesn't mean we're opposed to consumer protection, but a single agency whose sole purpose is consumer protection would be really bad news," Bennett said. "I've served in the executive branch. I know what happens when the culture around a single mission takes over an agency. Republicans say that consumer protection has to be tied to regulation so the regulator who's involved with regulation and consumer protection doesn't go overboard in one direction or the other."

Supporters see the CFPA's independence as essential. "For reform groups, this effort will not be successful without a stand-alone consumer agency. Putting consumer protection into a new, larger banking agency takes the failed structure of the Fed and the other existing banking agencies and consolidates it. These regulators repeatedly prioritized banks' business practices over consumers' financial security, and this proposal is a recipe for more of the same," said Graham Steele, policy counsel with Public Citizen's Congress Watch.

Rep. Brad Miller (D-N.C.), who championed the CFPA in the House, where it passed as an independent agency, said that he wants an agency much stronger than the EPA.

"I don't want the CFPA to be 'another EPA' either," he said. "I want the CFPA to be a tough, independent watchdog for consumers. My worst nightmare is a CFPA headed by some embarrassing yes man like [Bush administration EPA administrator] Stephen Johnson. How much more slavish to polluters did Republicans want the EPA to be? We have no idea how many Americans have cancer or children have birth defects because polluters ran the EPA for the last decade."

When Senate banking committee Chairman Chris Dodd (D-Conn.) crafted his original financial reform package last year, ranking Republican Richard Shelby (R-Ala.) made complete removal of the CFPA a condition for participating in negotiations, people involved in the talks tell HuffPost.

Dodd rejected the conditions and crafted a package without GOP support, introducing it in November.

With Dodd moving forward, the GOP relented and agreed to come to the table. "That was several weeks ago," Dodd said of the GOP line in the sand, saying that negotiations are now progressing smoothly.

But Dodd, people close to the negotiations say, is concerned that a strong, independent CFPA might not be able to get the 60 votes needed to break a filibuster.

Backers of consumer protection, meanwhile, are itching for the fight, daring lawmakers to stand on the side of the financial industry.

The CFPA is such a high priority to both parties that Dodd tasked himself with working out a compromise with Shelby, while delegating much of the rest of the negotiations to bipartisan pairs of lower-ranking lawmakers.

"I think it's a question [for Republicans] of 'What does it look like now?' more than 'Can we have it at all?'" says Sen. Robert Menendez (D-N.J.), a senior member of the committee. "They don't like it as a separate agency, for sure."

Sen. Evan Bayh (D-Ind.), a senior committee member, said that "how to protect consumers, whether to have a stand-alone agency, the powers of that agency, that's one of the big issues."

Currently, the Federal Reserve is technically tasked with consumer protection -- but its primary purpose is to protect the safety of the financial industry. Consumer protection, said Sen. Jeff Merkley (D-Oregon), a freshman committee member, has been "somewhere in the basement".

Republicans argue that consumers lose out if regulation is too tight and as a result, businesses close and jobs are lost. Democrats counter that a business that can't operate without wrecking the environment or ripping off consumers isn't worth saving.

Merkley and other committee members also argue that defrauding consumers can itself lead to systemic risk. When homeowners who've been hoodwinked into mortgages with skyrocketing and hidden monthly costs default, it's the banks -- and the banking system -- holding the loans that suffer.

Minority Whip Jon Kyl (R-Ariz.) said that if Democrats want financial reform to pass in 2010 they'll have to abandon the Democrats-only approach taken by Dodd late last year. Asked about the prospects for passing reform, Kyl told HuffPost, "For some kind of financial reform, probably not too bad. But for what they've been talking about in [the] banking [committee], not too good."

Before leaving for the Christmas recess, the committee announced bipartisan progress had been made and members on both sides of the aisle spoke optimistically. "Contrary to what you see happening on the floor as it relates to healthcare, I think we leave here as a committee on a high note, hoping that we're going to have the opportunity to do something that is very bipartisan and will stand the test of time," said Sen. Bob Corker (R-Tenn.).

Corker has been teamed with Sen. Mark Warner (D-Va.) and charged with reaching bipartisan agreement on a way to resolve large failed institutions. The duo has reported more progress back to the committee than any other pair, said a person familiar with the negotiations.

Meanwhile, committee Republicans are asking Dodd to keep a slow pace. "I think if Chairman Dodd is patient and continues to work across the aisle, it is definitely possible to get a bipartisan bill," said Sen. Mike Johanns (R-Neb.). "It happened with credit cards and I would have guessed at the time that was going to be very, very difficult to get done."

Senate Banking Committee hearing, July 14

Hearing link Senate Banking Committee, July 14, 2009

Senate Banking Committee link to archived video of the hearing

Source: Republicans Criticize Agency for Consumers Wall Street Journal, July 14, 2009

"WASHINGTON -- Senate Republicans criticized White House plans for a new agency to regulate consumer financial products as a hindrance to innovation and consumer choice, foreshadowing the battle lines taking shape around the proposal.

"I am greatly concerned over many aspects of the president's plan, not to mention its underlying premise," Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said in opening remarks at a hearing on the matter.

Republican Sen. Bob Corker of Tennessee called the proposal "an example of this administration being Big Brother" and "a tremendous overreach" that would limit what companies could sell and consumers could buy.

The proposed Consumer Financial Protection Agency would have broad authority to ban practices in the financial industry and require firms to offer "plain vanilla" products that carry fewer risks. It would oversee consumer protection for consumer credit products including mortgages, credit cards and auto loans.

Assistant Treasury Secretary Michael Barr, the administration's witness at the hearing, defended the plan, saying it wouldn't prevent firms from offering complex products, such as pay-option adjustable-rate mortgages. Firms will merely have to offer simple products alongside those products, he said.

"I trust consumers tremendously. What I don't trust is if you set up the marketplace to confuse consumers," he said. In his prepared remarks to the panel, Mr. Barr argued that the current system allows banks to shop for regulators with the lightest touch on consumer protection. Attitudes toward the proposed agency broke along partisan lines, with Democrats defending it. "It'll stifle innovation -- clever ways to dupe the consumer," said Democratic Sen. Charles Schumer of New York."

House efforts for the CFPA

Frank says may scrap overhaul bill with weak consumer unit

"House Financial Services Committee Chairman Barney Frank said he might scrap the regulatory overhaul legislation and start over if senators fail to approve a strong consumer-protection authority.

Senate Republicans should be forced to vote on the proposed compromise that would create a consumer-protection division at the Federal Reserve, an idea that would be a mistake, Frank said today in an interview for Bloomberg Television’s “Political Capital With Al Hunt” to be broadcast this weekend.

“I’m not sure that every Republican today in the Senate wants to stand up and defend the banks against the consumers, which is the way this plays out,” said Frank, a Massachusetts Democrat. “I’m not prepared to be complicit in a deal in the Senate that never has these issues debated.”

Senators are crafting a compromise on an idea offered by Senator Bob Corker, a Tennessee Republican, to create a consumer division at the Fed. Senate Banking Committee Chairman Christopher Dodd joined Corker, abandoning a stand-alone Consumer Financial Protection Agency proposed by President Barack Obama in June. Few lawmakers have embraced the compromise.

Frank said he may reconsider the legislation and start over if the consumer agency provision isn’t to his liking. “I might,” he said. “It depends.”

After the interview, Frank spokesman Steve Adamske said the lawmaker will review “the totality of the Senate bill” before acting. “We will insist on having a conference where there could be an open and public debate on the provisions of each bill,” Adamske said.

Frank, Waxman ironing out differences over CFPA

"Reps. Barney Frank (D-Mass.) and Henry Waxman (D-Calif.) are close to resolving their disagreement over how to structure a new federal agency to regulate consumer financial products.

The split emerged in late October with Frank, chairman of the House Financial Services Committee, favoring a single director for the new Consumer Financial Protection Agency (CFPA). Meanwhile, Waxman, chairman of the House Energy and Commerce Committee, supports having a commission in charge.

Steve Adamske, Frank's spokesman, said that the two chairmen are working on a compromise to have a director in place for a period of time, possibly two years, while the commission gets up and running and commissioners are named.

"We want to get the commission up and running," Adamske said.

The full House is planning next week to take up wide-ranging financial overhaul legislation, one of President Barack Obama's top domestic priorities. The structure of the new regulatory agency is one of several issues that Frank and other lawmakers are attempting to resolve before next week.

Waxman and other members of Energy and Commerce had argued that having a commission with members serving staggered terms would reduce the influence of the political party in power at the time. Frank has long supported a single director with a powerful role to sit at the same table as the nation's other regulatory bodies.

Frank has said he would like to see the agency run by Elizabeth Warren, the Harvard law professor who first started talking about the agency idea. Republicans and the financial industry have criticized Warren.

Pelosi backs financial protection agency

"House Speaker Nancy Pelosi (D-Calif.) is backing the creation of a consumer protection agency ahead of the final round of committee debate on a bill to overhaul the regulation of the financial services industry.

But the Speaker’s endorsement could put her at even further odds with the conservative wing of the Democratic Caucus just as she is grappling with how to win enough of their votes to pass a major healthcare reform bill out of the House.

“Congress is working with President Obama to protect American taxpayers by ushering in an era of honesty, fairness, transparency, and accountability in our financial marketplace and preventing the abusive anti-consumer practices that resulted in the worst global financial crisis since the Great Depression,” Pelosi said in a statement. “We will help achieve this goal by establishing a consumer financial protection agency, whose sole purpose is to protect the financial interests of America’s families.”

Rep. Barney Frank (D-Mass.), the chairman of the Financial Services Committee, hopes to complete committee work on his financial regulatory reform bill as early as this week. House Majority Leader Steny Hoyer (D-Md.) said this past week that he could bring the bill to the floor as early as the week after."

Energy Comm votes for commission structure

The Energy and Commerce Committee met on Thursday, October 29, 2009, at 1:00 p.m. in room 2123 Rayburn House Office Building. The committee considered H.R. 3126, the Consumer Financial Protection Agency Act of 2009.

A U.S. House of Representatives panel approved a bill on Thursday to create a Consumer Financial Protection Agency to oversee mortgages and other financial products while strengthening the pro-consumer Federal Trade Commission.

The House Energy and Commerce Committee voted 33 to 19 to create the new consumer agency. The House Financial Services Committee passed a similar measure last week, with expectation of a full House vote next month.

Lawmakers on the House Energy and Commerce Committee voted to make two major changes to the agency. First, it changed its structure to a five-member commission, with a limit of three commissioners from any particular political party. This would give the new agency the same structure as the Federal Trade Commission or Federal Communications Commission.

Rep. Barney Frank reacted immediately to this move. "Going from a single executive able to act promptly and efficiently to a five-member commission with staggered terms will weaken the capacity of the agency to provide consumer protection," he said in a statement.

CFPA approved in the Fin Serv Comm

Summary of the bill, H.R. 3126, which was approved in the House Financial Services Committee, October 22, 2009, by a vote of 39-29

"... "This is a very significant advance, and I predict it will only get better going forward," said Rep. Barney Frank (D-Mass.), the committee's chairman. "I believe it is a major breakthrough."

The bill is expected to head to the House floor for consideration in coming weeks. Meanwhile, the proposal faces a tricky path through the Senate Banking Committee, where financial lobbyists and other opponents have said they plan to target a handful of moderate, business-friendly Democrats who have expressed skepticism over the Obama administration's original proposal for the new agency.

The administration proposed the new agency in June as part of a larger package of reforms aimed at closing loopholes and reining in the abusive and risky practices that precipitated last fall's economic meltdown. It soon emerged as the most divisive, partisan element of the administration's plan. Republicans almost uniformly have opposed it. Banks and other financial firms, along with powerful lobbying groups such as the U.S. Chamber of Commerce, flooded Capitol Hill to complain that the new agency would add an unnecessary layer of government regulation, increase costs, stifle financial innovation and curtail choices for consumers."

Legislation likely to be adopted in some form

This month, Congress will begin to address the proposed Consumer Financial Protection Agency Act of 2009, known as the CFPAA, which is one piece of the dramatic financial regulatory reform that Barney Frank, Chairman of the House Financial Services Committee, introduced in July 2009. Initially, the CFPAA, as proposed, imposed federal financial regulation on a much broader spectrum of businesses than were previously subject to federal financial regulation, such as merchants, retailers, e-retailers, and other nonfinancial institutions. This week Chairman Frank released a memorandum indicating that merchants, retailers and other non financial businesses will be excluded from regulation under the CFPAA. Despite this apparent narrowing of coverage, the newly created Consumer Financial Protection Agency will nonetheless be responsible for rulemaking and subsequent enforcement of rules pertaining to a broad range of financial products and services.

This Update highlights key points of the proposed CFPAA—particularly for those businesses that have not historically been subject to federal financial service regulation—and offers practical advice for their directors and executives.

Many Businesses May Face New Financial Regulation

Definition of "Covered Person" Is Potentially Far-Reaching. The CFPAA would apply to any person who, directly or indirectly, engages in a financial activity related to consumer financial products or services, as well as to those who provide a material service to, or process a transaction on behalf of, one of these persons. In other words, "covered persons" under the CFPAA are those operating directly in a financial activity and those indirectly providing financial services intended primarily for personal, family, or household purposes.

Broadly interpreted, the CFPAA may cover any significant service provider of businesses that provide actual financial products or services, although according to Chairman Frank's recent memorandum, strictly ministerial or support services will be exempt. In addition, Chairman Frank's recent memorandum highlights other entities that will not be subject to regulation under the CFPAA, including accountants, real estate brokers and agents, lawyers, auto dealers, communications providers, consumer reporting agencies, and pension plan providers. The broad scope of the CFPAA may cause businesses that are only remotely connected to financial services to rethink their models and prepare to become regulated entities.

Definition of "Financial Activity" May Also Be Broad. The financial activities that trigger coverage under the CFPAA would include:

  • maintaining consumer report information, despite the exemption for consumer reporting agencies; providing real estate settlement services, despite the exemption for real estate brokers and agents;
  • leasing personal or real property;
  • processing financial data; and
  • acting as a custodian.

The newly created agency would also have the authority to define as a "financial activity" any other activity, other than engaging in the insurance business, unless the insurance provided is credit, mortgage, or title insurance. The broad definition of financial activity means that the CFPAA could nonetheless cover and impose regulations on businesses and individuals not traditionally considered within the realm of financial services.

CFPAA May Result in Overlapping Regulation

The CFPAA does not cover businesses and individuals already subject to regulation by the Securities and Exchange Commission or the Commodity Futures Trading Commission to the extent that they engage in an activity regulated by those agencies. If a business is already subject to traditional banking regulation, such as by the Office of the Comptroller of the Currency or the Office of Thrift Supervision, that business may find itself doubly regulated with the duties being split between the banking regulators for safety and soundness and the CFPAA for consumer protection. However, Chairman Frank's recent memorandum clarifies that depository institutions will have simultaneous examinations for federal safety and soundness and consumer compliance in order to minimize any regulatory burden.

Other Regulatory Agencies Would Transfer Relevant Authority

Under the CFPAA, all consumer financial protection functions and authority of the Federal Reserve System's Board of Governors, the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Federal Trade Commission will transfer to the new agency. The transfer of functions includes the transfer of personnel from these organizations to the agency.

Regulated Businesses Could Face Numerous New Fees and Penalties

A company regulated by the CFPAA will become subject to a number of new terms and obligations. For example, the CFPAA as originally proposed allows the new agency to charge companies subject to CFPAA regulation annual fees, assessments, and penalties for violations of the CFPAA of up to $1 million per day. These fees and penalties would support the agency's expenses and a consumer victim relief fund. However, Chairman Frank's memorandum clarifies that the Federal Reserve will fund the agency at a level that reflects the fees financial institutions that are currently regulated pay for regulatory consumer compliance, and that banks will not pay for the costs associated with the examination and supervision of non-banks. The CFPAA also authorizes the new agency to impose various duties on businesses, including those related to certain compensation practices of regulated businesses. To ensure compliance, the agency may require an examination of, or compliance reports from, regulated companies.

An Oversight Board Would Advise the Director

According to Chairman Frank's recent memorandum, a single director will govern the Consumer Financial Protection Agency and a Consumer Financial Protection Oversight Board would advise the director. This oversight board would include representatives from the federal banking agencies, the National Credit Union Administration, the Federal Trade Commission, the U.S. Department of Housing and Urban Development, and the Chairman of the State Liaison Committee of the Federal Financial Institutions Examination Council.

Legislation Is Likely to Be Adopted in Some Form

Leading business groups, including the U.S. Chamber of Commerce, oppose the CFPAA. However, most commentators believe Congress will enact some form of legislation similar to the CFPAA during the current congressional term. Any business involved in financial activities surrounding financial services or products should be aware of this potential change in regulation and the consequences for them.

No requirement for "reasonable disclosure"

"Rep. Barney Frank is paring back his plan to create a dedicated agency to oversee consumer financial products, addressing concerns raised by business groups and lawmakers, but chipping away at a central plank of the administration's plan to overhaul financial regulation.

Mr. Frank, a Democrat from Massachusetts who is chairman of the House Financial Services Committee, said in a memo to Democrats on his panel that the revised proposal for a Consumer Financial Protection Agency will eliminate the Obama administration's proposed requirement that financial firms offer "plain vanilla" products to consumers, a move banks said would reduce consumer choice.

Financial firms also wouldn't have to abide by a requirement that their disclosures be "reasonable," a requirement many said was too vague and would be hard to enforce.

Additionally, the new proposal would have the CFPA be funded by the Federal Reserve, which suggests that banks wouldn't have to pay any new fees. Mr. Frank's memo said banks and nonbank financial institutions, such as mortgage lenders, would be treated equally."

"Plain vanilla" mandate not likely

"MANY bloggers out there are lamenting the demise of a part of the Obama administration's proposed regulatory reform package that would have required financial institutions to offer "plain vanilla" products alongside their other, more complex options. The widely used example is that a bank discussing mortgage options with a potential borrower would have had to put on the table the standard 30-year, fixed-rate, no-tricks loan, alongside ARMs and Option-ARMs, and NegAms, and so on.

I've been trying to make up my mind how I feel about this. Mike Konczal makes a compelling case for the measure here, noting that the default option for many financial products—be they credit cards or chequing accounts—includes various and sundry poorly understood or nearly invisible fees that consumers rarely catch and often struggle to have turned off. That's no way to run a market. But does that suggest that mandated plain vanilla offerings are the order of the day? To me it seems like the more effective solution would be to require that financial institutions explain, in detail, each and every fee they are assessing (or might potentially assess) to customers. That would inform consumers of what's going on in the monthly bill, and it would create an incentive to reduce the number and complexity of fees, as lengthy explanations would be a hassle for all involved and would reduce business.

The vanilla offering seems to be intended to substitute for sophistication or research on the part of the customer, but I'm just not sure that's a good way to approach the issue. As best I can tell, the vanilla plan wouldn't mandate the price of the simple option; just because a bank would have to offer a vanilla mortgage loan doesn't mean it would have to offer a competitive vanilla mortgage loan. If that's the case, banks could easily use high rates on the simple products to steer individuals toward the complex offerings. Or, the vanilla rule could actually serve to direct bank collusion toward high-priced, high-margin products.

Given the extent to which customers are wary of being screwed by complex bank products, banks able to credibly offer true vanilla products could conceivably charge a premium to individuals desperate for peace of mind. But in most cases, consumers won't accept that the vanilla option is actually vanilla; they'll assume that banks are hiding fees in the 30-year, fixed-rate mortgage just as they hide fees in everything else. In that case customers may as well opt for the product with the lowest sticker price.

But if the government mandates that banks offer true vanilla products, then the credibility of the vanilla option is established. Bankers can say, and mean it, that there are no tricks embedded in the loan. Naïve consumers may feel that the simple, government-mandated vanilla plan has to be the cheapest, all things considered, since the banks aren't allowed to lard it with hidden fees, but of course, the interest rate might make up for those lost fees and then some.

Banks are very good at making money off of individuals who are simply not that comfortable with financial products. In some cases, it may make sense to try and build in protections for uninformed consumers, but the best bet may well be to force banks to educate their customers as much as possible. Some may still wind up getting raw deals, opting into loans that they don't fully understand. But there is a limit to the extent to which the government can do consumers' homework for them. All told, I'm not sure that the end of the vanilla option is the worst thing in the world for regulatory reform."

"Congress is expected to reject President Barack Obama's proposed mandate that banks offer customers "plain vanilla" financial products, such as a 30-year fixed mortgage.

The defeat would be a victory for the industry, which contends that such a proposal would give the government an unprecedented role in the marketplace.

Exotic financial products, particularly subprime mortgages, were considered a major factor in last year's financial crisis. Loans with low introductory rates that suddenly ballooned in size prompted defaults by cash-strapped homeowners.

Under Obama's plan, a new government agency would be established to monitor the fine print on such products as mortgages and credit cards. The Consumer Financial Protection Agency would require that lenders be up front about the cost of their products and offer customers a standard low-risk alternative.

Rep. Barney Frank, chairman of the House Financial Services Committee, is preparing legislation that would endorse the concept of the consumer agency. But Frank's version would not require financial firms to offer standardized products, said Steve Adamske, a spokesman for the Massachusetts Democrat.

The proposal also was expected to fall flat in the Senate, where conservative Democrats and Republicans say they are concerned it would give the government too much control in the marketplace and would limit innovation.

"Implied in this belief is the notion that some people, such as the government bureaucrats, can make informed decisions about the value of products and services while others, such as the American consumer, cannot," said Sen. Richard Shelby, the top Republican on the Senate Banking Committee.

Kirstin Brost, a spokeswoman for Sen. Christopher Dodd, said the Banking Committee chairman "has a hard time seeing how plain vanilla would work" but he is still working with his colleagues to draft the legislation.

The idea was promoted by Michael Barr, an assistant Treasury secretary for financial institutions, who says forcing banks to disclose more details about their loans wouldn't go far enough to protect consumers.

"It is time for a level playing field for financial services competition based on strong rules, not based on exploiting consumer confusion," Barr told the Senate Banking Committee in July."

Source: Rep. Frank introduces U.S. consumer agency bill Reuters, Wed Jul 8, 2009

"Frank's legislation makes a few tweaks to the administration's plan. The administration's proposal almost fully strips the current bank regulators' consumer protection roles, but Frank's bill would preserve their ability to enforce the Community Reinvestment Act. That act encourages banks to make loans in disadvantaged communities.

The bill to create the consumer agency will likely be among the first pieces of the administration's financial regulatory reform overhaul to move through the House. Frank said on Wednesday that his committee will polish legislative language on the proposal by the end of July."

From Investment News: July 9, 2009

"The bill, HR 3126, would give the proposed independent agency the authority to make and enforce rules to protect consumers who buy financial products such as mortgages and credit cards.

The legislation “addresses an issue at the heart of the financial crisis,” Mr. Frank said in a statement released late yesterday. The lack of mortgage modifications and fee increases “reinforce the need for this bill,” he said.

The Financial Services Committee will act on the legislation this month, Mr. Frank said.

The bill is the same as the administration draft, except that it preserves the role of federal banking regulators to enforce the Community Reinvestment Act, which requires banks to serve low-income communities.

Mr. Frank also said that the committee will take up the issue of a new national bank regulator that would merge the Office of the Comptroller of the Currency and the Office of Thrift Supervision at a later date."

Chairman Frank postpones markup

Source: Rep. Frank postpones consumer protection markup The Hill, July 21, 2009

"House Financial Services Committee Chairman Rep. Barney Frank (D-Mass.) is postponing until September a markup of a key part of President Obama's financial overhaul plans.

Frank had intended to mark up legislation on the Consumer Financial Protection Agency before the House adjourns for the summer, but his office confirmed on Tuesday that Frank will postpone work until after the August recess.

The agency idea is one of the first major parts of Obama’s overhaul to be debated in Congress as lawmakers begin to consider proposals to regulate “systemic risk,” derivatives and executive compensation policies.

The new consumer agency, backed by Frank and other Democrats, would gain the consumer protection authorities of other banking regulators. Industry groups have pushed back hard on the idea, saying it would have sweeping authority that could hamper financial innovation. More than a dozen groups, including the U.S. Chamber of Commerce, urged the committee to slow down the debate.

The House is scheduled to adjourn for August on July 31 and return the week of Sept. 7."


OpenCongress link

  • Title: To create a Financial Product Safety Commission, to provide consumers with stronger protections and better information in connection with consumer financial products, and to give providers of consumer financial products more regulatory certainty.
  • Sponsor: Rep Delahunt, William D. [MA-10] (introduced 3/25/2009)
  • Cosponsors (19)
  • Related Bills: S.566
  • Latest Major Action: 3/25/2009 Referred to House House Committee on Financial Services.

S. 566 Financial Product Safety Comm Act of 2009 link

  • Financial Product Safety Commission Act of 2009
  • A bill to create a Financial Product Safety Commission, to provide consumers with stronger protections and better information in connection with consumer financial products, and to give providers of consumer financial products more regulatory certainty.
  • 3/10/2009--Introduced.
  • Financial Product Safety Commission Act of 2009 - Establishes the Financial Product Safety Commission to:
    • (1) promulgate consumer financial product safety rules;
    • (2) establish a best practices guide for all providers of consumer financia... more
  • Sponsor Sen. Richard Durbin [D, IL] and 5 Co-Sponsors
  • Committees Senate Banking, Housing, and Urban Affairs
  • Amendments - This bill has no amendments.

RSS Feed Available from to follow news coverage of this legislation

RSS Feed Available from to follow blog coverage of this legislation

House Energy/Commerce hearing, July 8th

Lawmakers reactions

Source: Democrats skeptical of consumer protection agency Associated Press, July 6th, 2009

"House lawmakers who oversee the Federal Trade Commission said they were concerned the proposal would weaken the FTC and suggested that the commission be given more resources instead.

Their remarks, while in contrast to more powerful members of Congress who support the plan, suggest that Obama's goal of clamping down on the financial industry is easier said than done. Government turf battles, along with industry opposition, could threaten to slow the plan's enactment.

"I have more than a modest degree of skepticism regarding the administration's proposal," said Rep. John Dingell, D-Mich., at a hearing by the House Energy and Commerce subcommittee on trade and consumer protections.

Rep. Bobby Rush, chairman of the subcommittee, said he disagrees with stripping the FTC of any of its current powers.

"Looking at all reliable indicators, the commission has performed commendably with a small and scrappy staff and abridged powers," said Rush, D-Ill.

Michael Barr, assistant secretary for financial institutions at the Treasury Department, said the shift in power is necessary to provide consistent oversight to mortgages throughout the life of the loan, from sale to payoff or foreclosure.

"We need one agency for one marketplace with one mission — to protect consumers of financial products and services — and the authority to achieve that mission," Barr said.

Nearly every member of the House panel told Barr that they had doubts. Republicans were the most blunt.

"They don't know how much they are going to spend. They don't know what resources they're going to need. And also they are going to be taking on expertise on areas they know nothing about that the Federal Trade Commission has years on," said Rep. Cliff Stearns, R-Fla."

Hearing details

The Subcommittee on Commerce, Trade, and Consumer Protection will hold a hearing entitled "The Proposed Consumer Financial Protection Agency: Implications for Consumers and FTC" on Wednesday, July 8, 2009, 10:00 a.m. in room 2123 Rayburn House Office Building.

The hearing will examine the Administration's proposal to create a new agency responsible for consumer protection with regard to financial products and services.


  • The Honorable Jon Leibowitz, Chairman, Federal Trade Commission
  • The Honorable Michael Barr, Assistant Secretary for Financial Institutions, Department of Treasury
  • Gail Hillebrand, Senior Attorney and Manager, Financial Services Campaign, Consumers Union
  • Stephen Calkins Esq., Associate Vice President for Academic Personnel and Professor of Law, Wayne State University
  • Prentiss Cox, Associate Clinical Professor of Law, University of Minnesota
  • Rachel E. Barkow, Professor of Law, New York University School of Law
  • Chris Stinebert, President and CEO, American Financial Services Association

Overview of President's Proposal for a CFPA

  • Create a new independent federal agency, the Consumer Financial Protection Agency, with sole rulemaking authority for consumer financial protection statutes, and with supervisory, examination, and enforcement authority over "all entities subject to its regulations," including providers of credit, savings, payment, "and other consumer financial products and services."
  • Disallow preemption of state consumer and investor protection laws.
  • Establish a Financial Consumer Coordinating Council under the leadership of the Financial Services Oversight Council.
  • House Financial Services Committee will hold a hearing: “Regulatory Restructuring: Enhancing Consumer Financial Products Regulation” on Wednesday, June 24 at 10:00 a.m. in Room 2128, Rayburn House Office Building, Washington, DC.

Treasury details specific proposals (June 30, 2009)

Source: Wall Street Journal, June 30, 2009

According to the draft legislation, Treasury’s plan would:

  • 1) Give the agency broad authority to write rules about services or products including:
    • a. Deposit-taking activities
    • b. Extending credit and servicing loans (this could include mortgages, credit cards, etc.)
    • c. Check-guaranty services
    • d. Collecting, providing, or analyzing consumer report information
    • e. Providing real estate settlement services, including title insurance
    • f. Leasing personal or real property
    • g. Investment advisers that aren’t already regulated by the CFTC or SEC
    • h. Processing financial data
    • i. Sale or issuance of stored value cards
    • j. Acting as a money service business
    • k. And any other activity the agency defines as a rule, except for most types of insurance, which are exempt.
  • 2) Give the agency five board members, four of whom would be appointed by the President and confirmed by the Senate and the fifth would be the head of the regulator overseeing national banks.
  • 3) Appropriate money to run the agency while also allowing the agency to collect annual fees or assessments from companies it supervises. The bill would also establish a victim’s relief fund for penalties collected by the agency.
  • 4) The agency’s objectives would be to make sure consumers can make informed decisions about financial products and services, protect them from abuse, make sure markets operate fairly and efficiently, and ensure that all consumers have access to financial services.
  • 5) Permit the new agency to prohibit or place conditions on mandatory pre-dispute arbitration agreements between consumers and firms such as credit card companies “if doing so is in the public interest and for the protection of consumers.”
  • 6) Ensure that any rule adopted by the new agency would new preempt state law “if State law provides greater protection for consumers.”
  • 7) Allow state attorneys general would be allowed to bring law suits for violations of new federal rules.
  • 8) Allow the new agency to file subpoenas to collect information for the companies they oversee.

Congressional Research Service report on CFPA

Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency (CFPA) as Proposed by the Obama Administration and H.R. 3126, CRS, July 17, 2009


In the wake of what many believe is the worst U.S. financial crisis since the Great Depression, the Obama Administration has proposed sweeping reforms of the financial services regulatory system, the broad outline of which has been encompassed in a nearly 90-page document called the President’s White Paper (the White Paper or the Proposal).

The Proposal seeks to meet five objectives:

  1. “Promote robust supervision and regulation of financial firms”;
  2. “Establish comprehensive supervision and regulation of financial markets”;
  3. “Protect consumers and investors from financial abuse”;
  4. “Improve tools for managing financial crises”; and
  5. “Raise international regulatory standards and improve international cooperation.”

The Administration likely will offer specific legislative proposals that would implement each of the five objectives of the White Paper.

On June 30, 2009, the Obama Administration made available the first such legislative proposal, called the Consumer Financial Protection Agency Act of 2009 (the CFPA Act or the Act). The Act would establish a new executive agency, the Consumer Financial Protection Agency (the CFPA or the Agency), to protect consumers of financial products and services.

On July 8, 2009, Representative Barney Frank, Chairman of the House Financial Services Committee, introduced very similar legislation, H.R. 3126, which also is entitled the CFPA Act of 2009.

This report provides a brief summary of the President’s CFPA Act and delineates some of the substantive differences between it and H.R. 3126, as introduced. It then analyzes some of the policy implications of the proposal, focusing on the separation of safety and soundness regulation from consumer protection, financial innovation, and the scope of regulation.

The report then raises some questions regarding state law preemption, sources of funding, and rulemaking procedures that the Act does not fully answer.

Secretary Geithner on the CFPA

"The need for a dedicated, consolidated consumer protection agency is clear. The current consumer protection system failed to protect consumers, responsible providers, or market efficiency and innovation.

It failed to protect consumers from unexpected risks. Instead, it led them into a housing and consumer debt crisis.

It failed to maintain a level playing field for responsible providers; instead, it let a large unregulated sector drag down standards.

And it failed to set clear rules of the road for sustainable innovation to thrive. Instead, it left a vacuum in which institutions, including many subject to extensive federal oversight, followed their competitors down the easy path of tricks and traps for short-term gain.

These failures were structural. That is because there is no home in today's regulatory system for the mission of protecting consumers and providing the market clear rules for sustainable innovation. There is no authority in federal regulations for watching over the parts of the consumer market that are operated by non-bank institutions. And the authority for watching over banks in that market is so fragmented among regulators that it encourages them to drag feet and point fingers instead of acting, and invites corrosive competition in regulatory laxity.

Consumer protection cannot be reformed without addressing these structural problems. Our proposal will address them directly. It will consolidate fragmented consumer authorities into one agency, the Consumer Financial Protection Agency (CFPA), which will write rules, oversee compliance, and address violations by non-bank providers, as well as banking institutions.

Effective protection requires consolidated authority to both write rules and conduct oversight and enforcement.

Combining these authorities will ensure that the agency has a wide range of tools to address any problem within its domain, and can choose those that are most effective and impose the least burden.

Rule-writing authority without supervisory authority – including reporting and examinations – and enforcement authority would risk creating an agency that is weak and ill-informed, and dominated by agencies with enforcement authority. If enforcement and supervisory authorities remain divided among the agencies as they are today, we will continue to see regulatory inertia and arbitrage, uneven protection, and eroding standards. Just as importantly, a rule-writing agency that does not receive information from and examine institutions and address their violations will not understand how institutions operate and the burdens that regulations put on them. Such an agency will likely underestimate the costs of regulation and fail to get the balance between costs and benefits right.

Our proposal will not create new bureaucracy for banks. It will take consumer authorities spread across many agencies and combine them in one place.

Our proposal will not increase the regulatory burdens on community banks. Most community banks do not pay assessments for federal supervision today, and our plan will preserve that arrangement. Examination schedules will be coordinated between agencies, which will exchange examination reports to promote consistency. Clear delineation of agencies' roles will keep conflicts to a minimum, and the rare conflict will be resolved with a reasonable dispute resolution mechanism. In the case of mortgages, institutions making them will see a cost savings when the agency integrates federal mortgage disclosures now implemented separately by two different regulators.

The CFPA will save firms from having to face a choice between losing revenues or stooping to the questionable practices of less-responsible competitors. This will be of particular benefit to community and regional banks that lost revenues when they refused to compete on terms set by unregulated mortgage lenders and brokers. These banks' competitors in the non-bank sector will face federal oversight for the first time.

Moreover, the CFPA will allocate its oversight resources on the basis of risk to consumers. Firms that pose less risk to consumers will face proportionally less burdensome oversight. Risk-based oversight will help banks that have the strongest incentives to treat their customers fairly because they serve a relatively fixed customer base in a limited geographic area and have deep ties to their communities. These are most frequently community banks.

Our proposal will also meet the challenge of preserving innovation. It will do so by giving the agency a focused and balanced mission to protect consumers from abuse while simultaneously ensuring that markets are efficient and that innovation can thrive.

Innovation is essential to the growth of our financial system and the prosperity of our country. We especially value innovation in consumer financial products because it better matches products to consumer preferences. But without clear rules, firms can innovate in ways that erode standards and threaten stability.

Without adequate regulation, American families were enticed to switch credit cards with balance transfer offers at low interest rates of which they could not take advantage if they put gas and groceries on the card. They got mortgages with interest rates that shot up painfully in two years or sometimes less, and which often had increasing loan balances. They got hidden late fees, penalty rates, and prepayment penalties. These risks were disclosed, if at all, in fine print that no reasonable consumer could be expected to see and understand.

When developments such as these were introduced, they were frequently hailed as innovations. And in fact, features that can harm some consumers but provide more benefit to others have a place in a well-functioning market. We firmly believe that consumers should have the ability to choose those offerings that they believe best meet their needs if they can make well-informed choices.

Consumers can not be assured the opportunity to make informed choices about the risks without clear rules of the road. Innovation without regulation leads to a race to the bottom based on exploiting consumer confusion. Without rules, the firm that makes its product appear more attractive by hiding the real cost to the consumer wins. Perhaps a firm does not want to take that route, but competition forces it to. Without a strong framework of regulation, banks and other providers compete to take advantage of consumer confusion rather than to better serve consumer preferences. This must end."

Arguments against establishing CFPA

  • Establishes another bureaucracy
  • Current agencies should be more adequately coordinated
  • Enforcement of current authorities should be heightened
  • Concern about bifurcating safety and soundness regulator from consumer protection
  • Enhance required disclosures
  • Relies first on state regulators and will require community banks to pay more although generally community banks don't offer complex, "dirty" products
  • Can't separate the regulation of banks from their products (SEC/Finra?)
  • Banks complaining that they will have an additional compliance (raise costs)
  • Financial Services Roundtable media release arguing against the CFPA, June 30, 2009
  • Board governor fights to keep consumer protection role for Fed, Aug. 24, 2009

Arguments in favor of establishing CFPA

  • The CFPA would represent less restrictive federal regulation than many other industries
  • Bad retail products have high default rates and create systemic risk
  • Standardized products substantially reduce compliance costs and increase efficiency of markets
  • Doesn't make states subject to the Federal Reserve or CFPA on securities regulation
  • Reduces reliance on consumer disclosure as primary safeguard
  • The CFPA will develop of body of specialized knowledge for this space like the EPA has for environmental law
  • Current agencies are internally conflicted >> the Federal Reserve has monetary policy (bank profitability) and consumer protection responsibilities and makes monetary policy primary
  • Helps small banks because current compliance load is crippling
  • Smaller institutions generally offer "cleaner" and "clearer" products
  • Safe harbor for "plain vanilla" products

Mortgage lending regulations

Mortgage lending standards declined during the boom and complex, risky mortgage offerings were made to consumers that arguably did not understand them. At the height of the bubble in 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever. [1]

An estimated one-third of ARMs originated between 2004 and 2006 had "teaser" rates below 4%, which then increased significantly after some initial period, as much as doubling the monthly payment. [2]

  • Arguments for min down payments/lending standards

Warren Buffett stated in February 2009: "The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10 percent and monthly payments that can be comfortably handled by the borrower's income. That income should be carefully verified." [3]

China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.[4]

The Fed implemented new rules for mortgage lenders in July 2008.[5]

  • Arguments against min down payments/lending standards

Higher lending standards may place downward pressure on economic growth and prevents those of lesser economic means from owning their own home.

Unresolved issues

  • Where to locate the Community Reinvestment Act?
  • Leave securities regulation at the SEC and beef it up?
  • Should we focus new agency on bank products only?
  • Regulation of annuities and insurance products?
  • "Law making" or "law enforcement" agency
  • H.R. 2609/Insurance Information Act of 2009
  • Commission bias

State preemption and the CFPA

In July 2009, the House Financial Services Committee introduced the Consumer Financial Protection Agency Act of 2009 (“H.R. 3126”). Among other items, H.R. 3126 would eliminate federal preemption of state consumer protection laws, which would encourage states (and even municipalities) to reintroduce a scattering of local rules and regulations. Federal rules promulgated by the Consumer Financial Protection Agency would override “weaker” state laws, but the states would be free to adopt “stricter” laws. The National Bank Act (NBA) and the Home Owners’ Loan Act (HOLA) would be amended to provide that state consumer protection laws apply to national banks and savings institutions. In addition, the NBA and HOLA would be amended to provide that their respective “visitorial” provisions would not prevent a state Attorney General’s enforcement of federal or state law.

Since the National Bank Act of 1864, U.S. banks and their customers have benefited enormously from the preemption of state and local rules. Uniform, national regulatory standards have allowed banks to issue a consistent set of terms for mortgages, credit cards, and business loans. Literature focusing on the politics of preemption, rather than on the economic effects, largely misses the efficiency gains from standardizing regulatory policy.

The arguments put forward by critics of preemption generally fail to consider the economic benefits of preemption and lack empirical validation. When preemption is considered from an economic efficiency standpoint, its merits become apparent (as they have also been to the Supreme Court). The economic literature has historically supported preempted laws that impose a proportionately greater compliance burden on smaller, multistate companies unable to realize economies of scale. Hence, by encouraging competition between banks, uniform standards lead to lower costs of credit and greater capital availability. The most significant preemption decisions made by the Office of the Comptroller of the Currency over the last two decades have enhanced competition among banks and thwarted price controls, increasing overall economic efficiency. Preemption has been used to open markets, expand access to banking services such as ATMs, democratize credit, and simplify regulatory compliance. Accordingly, placing barriers to preemption would raise bank operating costs and restrict bank operations, hurt customers, and suppress economic growth.

Moreover, none of the top 25 subprime loan originators in the recent crisis were national banks, only one was an FDIC insured bank, and the five lending operations that were associated with bank holding companies were fully subject to state law—further undermining the preemption opponents’ arguments that preemption is to blame for the subprime crisis. Similarly, the U.S. Treasury, itself, recently noted that 94 percent of “high-priced loans” to “lower income borrowers” were originated by lenders not covered by the Community Reinvestment Act.

In summary, from an economic perspective consumer protection and preemption are not contrary policies, but rather are different means of ensuring that financial markets function to maximize the banking services available to consumers. When markets are competitive, increasing the operating cost of firms through a patchwork of state regulation will result in higher prices for consumers. Likewise, protecting high-cost firms in a given state from competition against more efficient (out-of-state) firms will result in higher prices for consumers. Protecting consumers does not require policymakers to eviscerate U.S. national banking regulation that has provided a substantial basis for banking industry stability and economic growth since 1863.

Summaries of the CFPA draft

States’ vs. federal rights

Business lobbyists and centrist lawmakers are raising questions about the relationship between state and federal law under the proposal. The debate revolves around whether the new federal agency should have the power to pre-empt state action.

The administration proposed that the agency would set a minimum for regulation. Regulators and lawmakers at the state level would then be free to pursue stricter or additional regulations. That has business lobbyists worried and cuts to the heart of a long-running debate about state versus federal rights. The financial industry argues that by merely setting a floor for regulation, the proposal raises the specter of firms complying with a patchwork quilt of state laws. A range of laws would, industry lobbyists argue, increase the burden on firms and make compliance much more expensive. Those costs might then be passed on to consumers in the form of higher fees or less attractive deals.

Many centrist lawmakers back partial or full pre-emption of state laws to avoid a hodgepodge of regulation.

‘Plain vanilla’ products

As part of its effort to bolster consumer protection, the administration wants to encourage simpler terms and contracts for financial products such as home loans. The extraordinary growth in the markets for sub-prime and other loans to riskier borrowers — many of which were made by non-bank lenders — led to a bubble and later a collapse in the housing industry. That, in turn, helped spur the financial crisis.

The administration’s proposal authorizes the CFPA to require “plain vanilla” products alongside other products. The agency would also have the power to define product standards. That has many in the financial industry worried. Financial lobbyists argue that consumers want flexibility and “common-sense” products.

Frank earlier this summer raised questions about whether it was possible or even desirable for the government to require that firms offer “plain vanilla” products.

Rulemaking authority

The administration proposed that the agency have broad rulemaking authority. While that may not drive the most heated opposition to the proposal, rulemaking authority would be at the heart of the new agency’s power. The administration wants the CFPA to have sole rulemaking authority over consumer financial protection statutes — authorities that now reside with many agencies.

As proposed, the administration intends for the agency to “consult” with other financial regulators. There are no strong requirements, however, that the CFPA agree with the other regulators. The industry is concerned that this further separates the government’s consumer-protection powers from the responsibilities to oversee safety and soundness. “We would like to see more input from the safety and soundness agencies,” said Steve Verdier, senior vice president of the Independent Community Bankers of America (ICBA). “We’d like to see some joint rulemaking.”

Supervisory and enforcement authority

Closely related to the issue of rulemaking authority is a debate swirling about the scope of enforcement power. At root, the issue is over the agency’s teeth. The administration wants to move the consumer protection responsibilities of the nation’s existing financial regulators under one roof. Lobbyists against the proposal want to see the consumer protection powers reside with the existing regulators. “The fate of the institution and the fate of consumers are inextricably linked,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. “We want one regulator overseeing both aspects.” The current regulators, worried about losing their turf, have pushed back against the proposal. Consumer watchdog groups and some congressional critics, meanwhile, have lashed out at the regulators for neglecting their responsibilities in the run-up to the crisis.

Business lobbyists, particularly for banks, raise the possibility that examinations and enforcement could remain with the existing regulators even if the new agency has broader rulemaking power. “I think there is a strong possibility to keep the enforcement for the banks within the existing banking agencies,” Verdier said. “That’s probably our highest priority.” Banks are worried about the burdens of additional examination from different regulators.

Federal Reserve releases consumer compliance supervision policy

"On Tuesday, the Federal Reserve released a letter announcing the launch of its new consumer compliance supervision program. The program, effective immediately, is meant to investigate consumer complaints against nonbank subsidiaries of bank holding companies and foreign banking organizations.

The Federal Reserve states that "[t]his policy is designed to enhance our understanding of the consumer compliance risk profile of non-bank subsidiaries and to guide our supervisory activities for these entities."

The press release announcing release of the letter states that the program is based on a 2007 pilot project, started by the FTC, OTS and two associations of state regulators, that reviewed certain non-depository lenders with significant subprime mortgage operations with respect to consumer protection compliance. This letter came one day after President Obama addressed the Wall Street leaders and pushed for legislation that would create new rules to protect consumers and the creation of a Consumer Financial Protection Agency, which would assume the compliance duties the Federal Reserve is currently authorized to oversee.

State AGs back CFPA

Source: State AGs back Obama on financial oversight agency The, August 18, 2009

"State attorneys general are pushing Congress to set up a federal agency to oversee consumer financial products, backing one of the most controversial aspects of President Barack Obama's proposed financial regulatory overhaul.

The 24 attorneys general said in a letter this week to House and Senate lawmakers that a new agency is "vital" and the "best option for meaningful consumer protection."

But the letter represents the views of almost only Democratic attorneys general in support of a proposal that faces widespread opposition from Republican lawmakers on Capitol Hill as well as some concerns from Democrats. The letter was signed by 22 Democrats; one Republican, Mark Bennett of Hawaii; and one independent, Alicia Limtiaco of Guam."

Consumer coalition in support of the CFPA

Source: Press of Atlantic City

"A coalition of national consumer protection agencies this week applauded President Barack Obama's proposal to create a federal Consumer Financial Protection Agency, saying it would consolidate most federal consumer protection efforts into a single agency. Currently, seven federal agencies handle consumer protection in financial services, and five of those also oversee the financial soundness of specific financial institutions.

"Too often, captive federal banking regulators have treated consumer protection as less important or even in conflict with their supposed primary mission to ensure the safety and soundness of financial institutions," said Ed Mierzwinski, consumer program director of U.S. PIRG, in a written statement. "The president's proposal would streamline and dramatically improve the current splintered, ineffective federal financial regulatory system."

Under the president's proposal, the agency would oversee all credit and payment products, regardless of what kind of financial institution offers them, according to Public Citizen, Consumer Federation of America, U.S. PIRG, Consumers Union, National Consumer Law Center, Consumer Action and the Center for Responsible Lending.

"The economic crisis has caused a painful loss of confidence in financial products and institutions. It appears that no one was minding the store," said Linda Sherry, of Consumer Action, in the written statement.

The president's proposal is similar to legislation (S 566/HR 1705) sponsored by U.S. Sen. Richard Durbin, D-Ill., and Rep. William Delahunt, D-Mass. "By having a strong agency with the explicit mission of preventing abusive lending, we'll ultimately build a stronger economy and restore confidence in the credit markets," said Kathleen Keest, of the Center for Responsible Lending."

Lobbying against the CFPA

"Hundreds of small-town bankers had converged on Washington for their annual conference five months ago when Treasury Secretary Timothy F. Geithner, addressing them in the chandeliered ballroom of the Grand Hyatt, gave notice that the financial industry was about to change.

He offered them a glimpse of the Obama administration's plans to overhaul bank regulation, leaving them with the unsavory feeling they'd be facing more of it.

"He was very direct about the fact that this was a proposal that was going to be sweeping," recalled Chris Williston, president of the Independent Bankers Association of Texas. "That's when it started gearing up. We knew at that time we had a major battle on our hands."

That battle, which unfolded not only in the marbled halls of the Capitol but also in small communities in every corner of the land, culminated last week when lawmakers granted these firms a major concession, agreeing to exempt banks with less than $10 billion in assets -- 98 percent of all U.S. banks -- from a proposal for additional oversight. Unlike the country's biggest financial firms, these 8,000 smaller banks would not be subject to annual examinations conducted by a new federal agency responsible for regulating credit cards, mortgages and other loans to ordinary Americans.

While big Wall Street firms can each muster multimillion-dollar lobbying efforts and their top executives can pick up the telephone and reach senior government officials like Geithner, it was the collective voice of thousands of small bankers from Everytown, USA, capitalizing on their influence in their own communities, that turned this debate."

WASHINGTON -- The U.S. Chamber of Commerce is launching an advertising campaign of at least $2 million aimed at defeating a central plank of the Obama administration's financial-regulation overhaul.

But there won't be any mention of banks or Wall Street or insurance companies.

The first ads running in Washington-area newspapers feature a picture of a butcher with the line: "Virtually every business that extends credit to American consumers would be affected -- even the local butcher and the credit he extends to his customers."

The ads are aimed at the administration's proposed Consumer Financial Protection Agency, which would tightly regulate consumer products including mortgages and credit cards. It would have the power to ban certain practices and require financial firms to offer loans with simple terms and clear disclosure.

The Chamber's goal is twofold: move the spotlight off the unpopular commercial banks and mortgage lenders that are the target of the legislation and muster a roster of more sympathetic opponents.

"We want to go beyond the usual suspects to show how overreaching this is," said Amanda Engstrom, a senior vice president at the Chamber who created the lobbying and advertising campaign.

The lobbying push comes as Congress returns to work after a monthlong recess. While most attention on Capitol Hill will be on health care, lawmakers on the financial-services panels will continue to forge ahead on legislation in response to the financial collapse. Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee, plans to begin holding votes on his panel's parts of the legislation, including the consumer agency, later this month.

Asked about the butcher ad, Steve Adamske, a spokesman for Mr. Frank, called the campaign "scare tactics from the likes of big business."

"A coalition of financial services interests is in the process of organizing a major lobbying campaign against the Obama administration's plan for a Consumer Financial Protection Agency.

The plans are not yet final, but among the groups and firms in the discussion are the American Financial Services Association, Financial Services Roundtable, Mortgage Bankers Association and Community Bankers Association, according to two industry sources familiar with the plans.

The budget could be as high as several millions of dollars to organize grassroots opposition to the plan, launch an advertising campaign and contact congressional offices, according to one source.

The groups are hoping to get the effort up and running quickly because the administration and congressional leaders have set a tight timetable for passing legislation. They were listening to proposals on Wednesday from several advertising and grassroots advocacy firms."

"... Industry groups are opposed to the effort, arguing that it would restrict the flow of credit and hurt consumers. They are mobilizing a lobbying and advocacy campaign against the proposal and spent the recess hearing PR pitches from at least four firms.

The group includes auto financing and real estate loan interests, and could have a budget of several millions of dollars. Among the lobbying associations included are the American Financial Services Association, Financial Services Roundtable, Mortgage Bankers Association and Community Bankers Association.

Advocates for the agency idea, including consumer groups and labor unions, recently set up Americans for Financial Reform with a budget of $5 million...."

Global consumer protection efforts

FSA consumer protection tools

Regulating sale and rent back – the full regime], FSA, September 2009

One of the Financial Services Authority’s (FSA’s) four statutory objectives, set by FSMA 20001 is to improve public understanding of the financial system.

Under this remit, and our strategic aim of achieving a fair deal for consumers, the FSA leads the UK’s National Strategy for Financial Capability, which brings together industry, government and the third sector to deliver change in the population’s financial capability. The FSA’s Baseline Survey (Atkinson et al. 2006)2 found that many people are poor at keeping track, planning ahead, choosing products, staying informed and making ends meet. The survey acts as the foundation to our work. However, further research helps to build a more comprehensive picture of financial capability in the UK. This is especially important in the current economic climate, as more people than ever are facing difficult financial situations and finding their financial capability skills to be insufficient. Moreover, our recent Occasional Paper 343 showed that financial capability improves psychological wellbeing, reinforcing the wider benefits of financial capability to public policy.

FSA "Transparency as a Regulatory Tool"

Source: Transparency as a Regulatory Tool and Publication of Complaints Data FSA, July 2009

This paper sets out feedback on the responses we received to DP08/3 – Transparency as a Regulatory Tool; it outlines our current policy position and describes our next steps. It also incorporates a Consultation Paper on the proposed publishing of complaints data.

1.3 In May 2008 we published a Discussion Paper (DP), DP08/3 – Transparency as a Regulatory Tool. The paper looked at what we currently do and don’t disclose. Its aim was to stimulate an informed and energetic debate which recognised the powerful advantages that transparency can offer while at the same time carefully considering the disadvantages and limitations (including statutory barriers) of some forms of disclosure. Importantly, the paper reflected a clear distinction between simply making information available – which could in some cases cause confusion and have a negative impact – and publishing information in a way that improves how markets function by providing useful clarification.

FSA forms new investor protection committee

The Financial Services Authority (FSA), Office of Fair Trading (OFT) and Financial Ombudsman Service (FOS) have today proposed the creation of a new consumer protection committee to scan for emerging risks.

The committee would identify any risks with the potential to turn into widespread problems, and determine fast and effective ways of dealing with them, whether through regulatory action or consumer complaints.

The work of the committee, set out in today’s discussion paper, would update the wider implications process, which is often triggered once a problem has already had an impact on both the industry and consumers.

The new committee would draw together specialists from the three bodies to spot emerging risks, increasing the ability of the regulators and ombudsman service to respond quickly and decisively to the threats in the market.

The focus on emerging risks also complements the FSA’s ongoing intensive supervision regime, where firms’ business models are scrutinised along with their product design and marketing material to assess whether any single aspect, or indeed the entire operation, poses unacceptable risks to customers or the wider industry.

Sheila Nicoll, FSA director of conduct policy said:

"Complaints handling is a priority area within the FSA’s intensive supervision agenda. The co-ordination committee is a clear indication of the intention, and will, of the authorities to work even more closely together to improve the experience of consumers, and to avoid problems happening in the first place."

Ray Watson, OFT director of consumer credit, said:

"Identifying and dealing with problems at an early stage is important for ensuring consumers do not suffer unnecessary harm from financial products. We believe that the proposals for a new co-ordination committee and the focus on risk will improve our ability to deal with problems before they become widespread."

David Thomas, interim chief ombudsman:

"The ombudsman service is committed to preventing complaints, as well as resolving them. It's key for regulators and the ombudsman service to continue working closely together to identify potential problems as soon as they emerge, to ensure that consumers are treated fairly and can have confidence in financial services."

Australian consumer law

Australian consumer law – unfair contract terms

From 1 July 2010, ASIC will administer new law to deal with unfair terms in consumer contracts for financial products and financial services.

The introduction of a national unfair contract terms law is part of the new Australian consumer law which introduces a single, national consumer law.

The Australian consumer law was passed as the Trade Practices Amendment (Australian Consumer Law) Act (No.1) 2010 which amends the Australian Securities and Investments Commission Act 2001.

As part of these reforms ASIC also has new enforcement and consumer redress powers.

These new protections and remedies will assist ASIC to perform its role promoting the confident and informed participation of consumers and investors in the financial system.

Learning from the crisis

Source: Regulatory Issues Arising From the Financial Crisis for ASIC and for Investors and Financial Consumers Australian Securities and Investments Commission speech

Let me illustrate the work we do to protect retail investors and financial consumers by looking at a number of examples of work done by 5 of our stakeholder teams that are directly relevant to retail investors and financial consumers.

Our Investment Managers team is led by Senior Executive Leader Pamela Hanrahan.

The Investment Managers team has been active in relation to mortgage funds and unlisted property trusts. The team has been focused on improved PDS and ongoing disclosure (i.e. benchmark disclosure to improve information to investors).

They have, along with the freezing of mortgage funds, worked with trustees on hardship relief (i.e. enable withdrawal subject to a cap on grounds of hardship).

The team is involved in improving disclosure and conduct around the Managed Investment Schemes (some 5,000 of these exist). More recently their work has focused on the failed Great Southern and Timbercorp Managed Investment Schemes.

Going forward the team is establishing protocols to identify high risk individual firms within certain sectors for closer surveillance.

Our Superannuation Team, led by Senior Executive Leader Louise duPre-Alba, has been working to build confidence in our superannuation industry.

Two examples to illustrate their work:

Simple Super Advice: The Super Team has recently played an integral role in the release of a regulatory guide that facilitates the provision of personal advice from the funds to their members in relation to the member’s existing interest in a fund. This means that, when members get their periodic statement (this year negative returns of around 13% are reported in the media) they will be able to contact their fund to receive factual, general or personal advice.

Super risk disclosure project: The team is also working with industry to improve the quality and consistency of super risk disclosure. A comprehensive program of industry consultation has been completed and consultants reports are being completed. The next step is considering options for improvement for ASIC Commission consideration. Part of the project involves considering consistency in labeling, as this is critical to investors’ understanding of the risks associated with their super investment.

The work of our Consumers and Retail Investors team, led by Senior Executive Leader Delia Rickard, is another of our stakeholder teams. Let me mention two pieces of work now and also comment on the investor and consumer education work they perform.

Investor/Consumer resources: The team has developed a number of important new resources to assist financial consumers and retail investors. A most recent example; greater disclosure and understanding of the pitfalls in reverse mortgages.

This educational approach adds to our earlier work with industry on product design issues such as the importance of no negative equity guarantees.

The team has also developed and piloted our Investing Between the Flags seminars on investing basics through Centrelink’s Financial Information Service and is developing an accompanying publication.

The team’s work in developing these resources is very much influenced by the findings of behavioral economics and the need to fully understand why people do and don’t do things in relation to money. Consumer testing is critical, as we want to ensure what seems like a smart idea in the office is really going to be effective in the real world.

External Dispute Resolution improvements: As I’m sure most of you in this room are aware, the team has significantly expanded access to Australia’s free and independent external dispute resolution schemes. From 1 January 2010 schemes will be able to hear complaints up to $500,000 and provide increased levels of redress (from 1 January 2012) of at least $280,000. These reforms will ensure that many more consumers and retail investors will be able to bring their claims to EDR schemes, thus avoiding expensive litigation.

Our Financial Advisers team, led by Senior Executive Leader Deborah Koromilas, has been working to improve consumer confidence in financial advice. We want consumers to be accessing quality financial advice as this promotes rational and informed financial choices which in turn drives broader confidence in the integrity of our financial markets.

Quality of advice project: The team has launched a comprehensive project designed to improve the quality of advice in Australia. The project involves developing benchmarks, obtaining industry data, and considering key impacts on the quality of advice.

Surveillance activities: The team is also active in monitoring licensees. A simple example: in one matter a large licensee reported inappropriate advice for 4 clients. The licensee was then required to conduct a full review of all clients of a particular planner which resulted in the subsequent identification and remediation of a further 112 clients who had received inappropriate advice.

Going forward this team is also establishing protocols to identify high risk individual firms for closer surveillance.

Our Deposit Takers Credit and Insurance Providers team, led by Senior Executive Leader Greg Kirk, has also been doing important work to assist consumers.

Assisting borrowers in financial hardship: The team conducted an inquiry into how lenders and brokers deal with borrowers in financial hardship. Our findings showed that practices are inconsistent and range from good to poor. This work was used to inform the development of a set of principles announced by the Treasurer that are aimed at assisting borrowers. Industry has agreed to comply with the principles and ASIC will monitor the implementation.

Term deposits review: The team is currently conducting a review of the marketing and disclosure of short term deposit products, following the publication of an investor and consumer guide. A health check will be completed—looking at issues such as automatic rollovers etc—and the team will report back in the coming months.

You can see from these brief examples how our stakeholder teams are:

  • engaged in a range of initiatives which are aimed at improving disclosure and

market conduct, and

  • using the regulatory regime to better protect retail investors and consumers.


These stakeholder teams are also supported by strong deterrence or enforcement work from our 8 deterrence teams. Four of these support the stakeholder teams I have mentioned. Again, this hows the focus ASIC has on protecting retail investors and consumers.

A good example is the work we do to close illegal managed investment schemes. Over the last 3 financial years ASIC has acted against 179 managed investment schemes or companies for illegally raising funds involving around 7,330 investors and $401 million.

In addition, we have now shifted our focus to get money back for investors involved in failed schemes."

Australian Consumer Law Consultation Paper

Source: May, 2009, The Australian Government Treasury

"Unfair contract terms harm and exploit customers, whether they are ordinary people, institutions or businesses. They are common and exist in many contracts for the provision of everyday goods and services. They reduce competition by making contracts difficult to understand, and by limiting a customer’s choices and ability to seek out alternative options. They are used by some businesses to transfer all of the risk in a transaction away from themselves and onto the customer. There is no justification for their use in an effective and efficient market.

Unfair contract terms regulation has existed in the United Kingdom since 1977 and was adopted by the European Union in 1993. In 2003, Victoria followed suit and has had considerable success in enforcing this important consumer protection measure. With these examples in mind, the introduction of a national unfair contract terms law in Australia has been a matter of debate for some time.

The legislative implementation of this reform marks the culmination of an extensive policy development process, based on the work of the Productivity Commission in its comprehensive 2008 Review of Australia’s Consumer Policy Framework. The draft provisions have been developed through the shared effort of the Australian Government and its state and territory counterparts, through the Ministerial Council on Consumer Affairs (MCCA) and the Council of Australian Governments (COAG). In particular, I want to acknowledge the experience and expertise of Consumer Affairs Victoria and its key contributions to this process."

Consumer banking fees reduced

Source: New law puts $1b in bank fees at risk Sydney Morning Herald, July 13, 2009

"The banking industry has admitted that nearly $1 billion worth of fee income is at risk once a new consumer law governing unfair contracts comes into force next January.

Described last week by the competition regulator as a significant piece of legislation, the Federal Government's proposed unfair contracts laws will pose a direct attack on the penalty fees levied by the banks, consumer advocates say.

In particular, the industry will have to justify $40 late payment and overdraft fees that lawyers claim are significantly higher than the real charge for the banks, which are estimated to be less than $1 per transaction.

Data released by the Reserve Bank in May revealed that bank customers paid $1.2 billion in penalty fees out of a total of $11.6 billion of fee income the banks earned in 2008. The industry has accepted that more than three-quarters of the penalty fees - $954 million - could be avoided by consumers."

Australian product rationalisation process

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, today released a Proposals Papers as the next step in consultation with stakeholders on product rationalisation for managed funds and the life insurance industries.

Product rationalisation is a process of converting or consolidating products, such as managed fund or life insurance products, of a similar nature into a single product with equivalent features and benefits.

"The proposed product rationalisation mechanism offers a specific solution to the range of issues involved in the process of removing outdated products and transferring investors into newer and better products," Mr Bowen said.

"Importantly a proposed 'no disadvantage' test would ensure investors are not disadvantaged by product rationalisation.

"The proposals paper also outlines proposed tax relief for product rationalisation with restrictions to protect the integrity of the proposed tax concession."

Introducing a product rationalisation mechanism would benefit investors by transferring investors into modern products with superior features and would also remove a significant source of risks of error and fraud in the financial system by closing outdated legacy products.

Product rationalisation is a complex problem involving a range of issues that need to be addressed, including appropriate measures to address taxation issues.

"The proposed solution seeks to strike a balance between protecting the rights and benefits of investors, while offering product providers a practical and flexible process for developing product rationalisation mechanisms," Mr Bowen said.

"The development of these mechanisms would not only benefit investors but would also remove significant integrity concerns while reducing compliance costs for the Australian financial services sector."

The proposals set out in the Proposals Paper were those developed in consultation with a panel of experts and do not represent government policy at this stage.

Consultation process

This Proposals Paper follows on from an Issues Paper on product rationalisation published in June 2007. The paper contains a proposed product rationalisation framework including specific mechanisms for rationalising legacy products in managed investments and life insurance, and seeks relevant comments from the public on the framework and the proposed mechanisms.

Interested parties are invited to make written submissions that address, but need not be limited by, the issues and questions raised in this paper.

Australian Financial Ombudsman Service

ASIC has today approved new Terms of Reference (TOR) for the Financial Ombudsman Service Limited (FOS). This will give consumers increased access to the independent financial services dispute resolution body for new complaints received from 1 January 2010.

FOS deals with complaints from consumers and retail investors about member banks, credit unions, building societies, general insurers, life insurers, insurance brokers, financial planners and stockbrokers where the complaint could not be resolved in house.

The new TOR will provide a more consistent treatment of consumers and industry members than the currently operating five separate sets of rules and guidance of FOS’ predecessor schemes:

  • the Banking and Financial Ombudsman Service (BFSO) – now the General Banking stream of FOS;
  • the Insurance Ombudsman Service (IOS) – now the General insurance stream of FOS;
  • the Financial Industry Complaints Service (FICS) – now the Investments, Life Insurance and Superannuation (ILIS) stream of FOS;
  • the Credit Union Dispute Resolution Centre (CUDRC) – now the Mutuals stream of FOS; and
  • the Insurance Brokers Disputes Limited (IBDL) – now the Insurance Brokers stream of FOS.

Responsible lending obligations of Australian credit licensees

This paper sets out ASIC's proposals for guidance about meeting the responsible lending obligations of Australian credit licensees in Chapter 3 of the National Consumer Credit Protection Bill 2009.

The National Consumer Credit Protection Act 2009 (National Credit Act) requires credit licensees (other than those that are also regulated by APRA) to have adequate arrangements in place for compensating consumers.

Generally, these arrangements are expected to consist of professional indemnity insurance (PI insurance) that is ‘adequate’, although ASIC may also approve alternative arrangements. We have previously consulted on proposals about what we will expect of credit licensees under the new requirements, through Consultation Paper 111 Compensation and financial resources arrangements for credit licensees (CP 111). This current consultation seeks further feedback on three specific areas:

  • the amount of cover that is ‘adequate’ for licensees other than ‘pure lenders’;
  • the amount of cover that is ‘adequate’ for ‘pure lenders’ if they are not exempt from the requirement to hold PI insurance; and
  • the availability of automatic ‘run-off’ cover in light of recently released exposure draft regulations.

Australian consumer protection law implementation

  • Source: In Focus Australian Securities and Investment Commission, January, 2010

Special Issue - Getting ready for credit.

On July 1, 2010 the ASIC will take over regulation of consumer credit and finance broking. Learn more about this process will be implemented.

Access to registers

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has today released proposals designed to prevent predatory share offers to vulnerable and unsuspecting shareholders.

These reforms will also reduce the compliance costs for business by reducing the amount of resources needed to respond to requests for copies of member registers.

The Access to Registers and Related Issues proposals paper outlines planned changes to the law, including the requirement that companies only provide access to their share registers when requested for a "proper purpose".

"The Government is moving to stamp out the practice of scam artists using information obtained from share registers to target and rip-off unsuspecting shareholders," Mr Bowen said.

"The proposed changes will balance the needs of those seeking legitimate access to registers with the rights of those whose personal information is contained in the register."

The paper outlines proposals for reform developed from submissions in response to the options paper, Access to Share Registers and the Regulation of Unsolicited Off-market Offers.

Under the Government's proposals, companies will be authorised to refuse requests for access to their share registers unless the request is made for a "proper purpose". Any person seeking a copy of a company's share register would be required to specify in their request the purpose for which the information will be used.

A non-exhaustive list of "improper purposes" will be specified in the Corporations Regulations 2001 and will specifically include the use of a copy of the register for the purpose of making an unsolicited share offer to members of a listed company. Genuine takeover bids will be exempt from the access regime.

The Australian Securities and Investments Commission (ASIC) will also produce guidance material on what purposes can generally be considered proper.

New offences will be established that relate to issues such as improper use of register information and false or misleading applications.

The proper purpose test will not apply to applications to view a share register.

The proposals paper released today also outlines proposals to:

  • set down a three‑tiered fee structure for obtaining access to a company's register, with the fee chargeable to be based on the number of members contained in the register;
  • require a company to provide an electronic copy of its register in a format prescribed in the Corporations Regulations; and
  • reduce the cost burden on companies by allowing a register be viewed on a computer instead of the current obligation of printing a hard copy for applicants who only wish to view the register.

"These proposed technical changes will allow the law to keep pace with changes in technology, while reducing the compliance burden on businesses," Mr Bowen said.

1,500 mortgage brokers kicked out in Australia

"The peak industry mortgage body has kicked out 1,500 mortgage brokers for failing to meet minimum standards.

Mortgage brokers are the middlemen who get paid a commission for arranging home loans for customers with banks and other financial institutions.

The Mortgage and Finance Association of Australia (MFAA) says the brokers did not complete a TAFE certificate which ensures that they understand the law, the products, and interest rate calculations.

Consumer group Choice perhaps puts it the best, on its website it says, "you can be a panel beater one day and a mortgage broker the next."

The debate over industry standards has been going on for years. Phil Naylor, the head of the MFAA, says it has expelled 1,500 brokers to clean up the industry's image.

"The board of the Mortgage and Finance Association of Australia about two years ago decided that the minimum standard for membership would be that you had to at least have achieved a qualification which is course certificate four in mortgage and finance broking," he said.

"And we gave members quite some time to reach that standard - unfortunately around about 1,500 as of the 1st of September hadn't reached that standard, so we had no alternative but to cancel their memberships."

Australian "points of presence" report

The ADI Points of Presence publication is a detailed annual listing of the banking services provided to Australians by authorised deposit-taking institutions (ADIs). The data covers many types of service channels including face-to-face and electronic banking facilities.

The individual points of banking presence are categorised using the Accessibility and Remoteness Index of Australia (ARIA) which classifies the locations according to accessibility or remoteness.

Australians encouraged to mortgage shop

"Research from financial comparison experts shows that the reluctance of Australian consumers to shop around for the best deal is costing them $2.7 billion in excess mortgage repayments each year.

Despite the major banks continuing to offer significantly higher interest rates than other smaller competitors in the marketplace, 90 per cent of new home loans are currently being provided by the Big Four.

The InfoChoice research found that as a result this week’s latest rate rises from the major banks, more than 60 home lenders currently offer better mortgage rates than the CBA, Westpac, ANZ and NAB.

“Australian consumers are usually pretty savvy when it comes to their finances, and yet they continue to miss significant opportunities for savings when it comes to home loans,” said InfoChoice CEO Shaun Cornelius.

“The current reluctance from consumers to look beyond the majors is not doing anyone, least of all themselves, any favours,” he said.

“Rather than sit back and simply cop this latest round of rate rises, Australians should fight back and shop around for a better deal.”

The latest InfoChoice Rate Tracker research shows that following this week’s round of interest rate rises, the average Standard Variable Rate on offer from the majors is 5.78 per cent, more than half a percent more than the best Credit Union rate available.

According to the research, the discrepancy in mortgage rates between the Big Four banks and smaller, more competitive credit unions and building societies can now add up to three years onto the life span of the average home loan.

UK Mortgage Market Review

"...Non-banks increased their market share – in terms of mortgage balances outstanding – from 2% in 1998 to approximately 15-20% in 2008.

As these lenders are not deposit takers they were not subject to the same capital requirements as the banks and building societies and few of the current prudential reforms will have any impact on them.

In our paper we define four different high-risk characteristics: a high LTV ratio, no income verification, lending to credit impaired borrowers, and lending for the purpose of debt consolidation.

Most (but not all) banks and building societies have low-risk lending patters and low arrears rates.

However, there are a large number of lenders who operated particularly high-risk lending strategies and also have high arrears rates. Subsidiaries of banks and building societies perform worse, but non-banks are of particular concern: between 30% and 60% of borrowers on their mortgage books are in arrears. Their expansion was pursued primarily into new, higher-risk consumer segments, with very limited and vulnerable means that had previously enjoyed only limited access to mortgages.

For these firms we are considering different options, which could include restrictions on funding sources, more stringent assessments of individual business models, or risk-concentration limits similar to those we’ve proposed for building societies. The limits on higher-risk lending by building societies have been developed to avoid future financial difficulties, such as the ones we have seen in a few societies over the past couple of years as a result of a failure to identify and control the risks of diversifying away from prime residential lending. There may be a case for similar restrictions on high-risk non-bank lenders. We are also considering whether the current distinction between the prudential requirements for deposit-taking lenders and those for non-banks is fit for purpose.

There has been some comment in the press that we are being too tough on the non-banks, because they are needed in order to stimulate competition in the mortgage market and promote access. I agree we need competition in this market. We have no issue at all with new lenders entering the UK market – all that we seek is that the lenders operating have sustainable business models that can add value to our market in the longer term and which do not expose consumers to unacceptable levels of risk.

But our Mortgage Market Review is broad and covers a wide range of other areas of concerns. One such area is arrears.

I mentioned that the riskiest lenders have correspondingly high rates of arrears among their customers. Our thematic reviews have shown us the need to take action to make sure customers in arrears are treated fairly. We will consult in January 2010 on firming up our conduct of business rules on arrears handling and one proposal will be to ban firms from imposing arrears charges on those borrowers who have an agreed arrangement in place.

UK retail investor risk rating plan

Source: UK Financial Services Consumer Panel

"In 2004, the Treasury Select Committee carried out an investigation into the UK long term savings market. It observed "there is a need for urgent action to rebalance the asymmetries of information in the financial services industry by improving the information available to consumers".

It voiced particular concern about the poor communication of the risks inherent in savings products, making specific reference to the misselling of products which are especially sensitive to adverse market conditions, and where the investments were poorly matched to the buyer's liabilities.

Since then a substantial amount of work has been done both by the FSA and by trade associations such as the ABI and IMA to establish the scope for ‘a simple system of signalling the inherent risk level of a savings product', that would both ‘inform the consumer and ensure that the product provider had thought seriously about the risk inherent in the product’. Despite this widespread agreement of the need to improve communications and knowledge, the debate has lost momentum.

The Consumer Panel therefore felt that the time was right to reignite the debate over whether a standardised approach to explaining the inherent risk of a product would be useful for consumers. It decided to commission a research study with consumers to ascertain the appetite for such a system and to interview advisers to understand their opinions of this type of advisory tool.

The central objective of the research was to build up evidence of how much consumers, both directly and indirectly through advisers, would welcome more formalised and systematic information about risk when investment decisions are being made. A secondary objective was to understand how risk is currently being explained to financial services consumers.

The core proposition of the research was that risk ratings should:

    • a. be customer focused and easy to understand, using as much standardisation as possible – whether through numbers and symbols or consistent vocabulary;
    • b. cover all medium and long term retail products;
    • c. focus on the risk of not getting back what you put in;
    • d. be backed up by evidence; and
    • e. be stable over time.

Global approaches to "key information document disclosures" for retail

The CFA Institute Centre1 promotes fair, open, and transparent global capital markets, and advocates for investors’ protection. We attach great importance to the legislative proposals related to the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive, which establishes the common framework for laws, regulations, and administrative provisions relating to retail investment funds in the European Union.

The aim of the KID is to provide investors with clearer, more concise and relevant information about the essential characteristics of the UCITS concerned, over a 2-page document, in order to facilitate more informed decision making on the part of retail investors.

The Consultation addresses form and presentation, content of the KID and special cases in which the KID should be adapted for particular fund structures. It also includes annexes on the methodology for the calculation of the synthetic risk and reward indicator (SRRI) and for the calculation of charges.


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