The U.S. consumer financial services industry is well aware of the Treasury Department’s proposed new Consumer Financial Protection Agency (CFPA), intended to provide a partial solution to some of the causes of the recent consumer credit crisis. Under Treasury’s proposal, the CFPA would be an independent agency within the Executive Branch of government, and include four individuals appointed to 5-year terms by the President with the advice and consent of the Senate, who would serve together with the Director of a new consolidated federal bank regulatory agency (the so-called National Bank Supervisor) that would be formed to supervise all federally chartered banks. Under a modified version of Treasury’s proposal being considered by the House of Representatives, the CFPA director would be appointed to a 5-year term by the President with the advice and consent of the Senate, and there would be a separate oversight board that would advise the CFPA director, which would include the chairs of the Federal Reserve Board of Governors, FDIC, NCUA, Federal Trade Commission and the National Bank Supervisor, the Secretary of HUD, and an FFIEC representative.
The CFPA is supposed to facilitate “strong and consistent regulation and supervision of consumer financial services” and to strengthen existing consumer protection safeguards “across the financial sector [against] unfair, deceptive, and abusive practices” (quoting from a Treasury Department executive summary of its financial regulatory reform proposal). Some of the CFPA’s funding is expected to come (directly and/or indirectly) from assessments paid by its regulated entities (providers of financial products and services).
Much has been written about the details of the pending CFPA legislation, which will likely remain in flux pending input from consumer and industry representatives, members of Congress, and members of the Obama administration. It may be useful to step away from the details of the pending legislation, and look more broadly at the basic concepts of the proposed CFPA.
The proposed structure of the CFPA would apparently share many of the characteristics of existing federal regulatory agencies that are presently being blamed for inadequate regulatory, supervisory, and consumer protection activities. For example, the Office of the Comptroller of the Currency (OCC) is also part of the Executive Branch, and the Comptroller is appointed by the President with the advice and consent of the Senate to a 5-year term. The FDIC is an independent agency within the Executive Branch – its 5-person Board of Directors is appointed by the President and confirmed by the Senate. The current chair of the FDIC was appointed to a 5-year term. Both the OCC and FDIC are funded through assessments paid by their regulated entities. The seven members of the Board of Governors of the Federal Reserve System are similarly nominated by the President and confirmed by the Senate, and the Federal Reserve System is funded partially through fees and interest paid by financial institutions.
It is understandable that agencies created to supervise and regulate financial services providers, that are funded largely through assessments paid by those providers, will, over time, tend to understand issues from the vantage point of their regulated entities, and will also deliberately avoid micro-managing their regulated entities. Governmental agencies that depend on the health and well-being of their regulated entities for their ongoing survival will tend to avoid acting in a manner that would harm the fiscal health or competitive position in the general marketplace of their regulated entities in the foreseeable short term. It is unclear how the proposed new CFPA would be able to avoid the same systemic tendencies that can be observed presently at existing federal bank regulatory agencies.
Centralizing certain regulatory functions into one single federal agency also creates a new risk that the present system arguably has avoided – namely, that intense lobbying pressure may be focused on one single agency through a variety of sources, including members of Congress and members of the Executive Branch. The present system of multiple different federal bank regulatory agencies arguably diffuses this type of pressure. Consider recent press reports about undue pressure exerted on the Food and Drug Administration (FDA) in connection with its recent marketing approval of a certain mesh patch used in certain knee surgeries. The FDA is an agency of the Executive Branch (within the Department of Health and Human Services), and relies in part on industry “user fees” for its funding. A recently released FDA preliminary report describes “unusual perhaps unprecedented Congressional interest,” and an “aggressive” applicant trying to put “persistent pressure on agency decision-makers and processes” in connection with a request for marketing approval from the FDA. The FDA had initially declined two such marketing requests, and then “reversed course” and issued the requested marketing approval on December 18, 2008. The FDA preliminary report indicates that pressure on FDA staff did not just come from members of Congress – it also came from the FDA Commissioner (an individual nominated by the President and confirmed by the Senate). It is not at all clear how the proposed new CFPA would effectively insulate itself from similar external lobbying pressures.
Another potential benefit exists when two or more federal agencies share overlapping jurisdiction over the same consumer protection issues: If the agencies work together and coordinate their efforts, there could be more effective use of staff resources and potentially fewer regulatory “gaps” as a result of interagency coordination and synergies. Consider, for instance, whether we would be better off if food safety were regulated in the U.S. solely by the FDA or solely by the U.S. Department of Agriculture (USDA), instead of by both of these Executive Branch agencies acting in tandem. In fact, the FDA, USDA, and Centers for Disease Control collaborate on various U.S. food safety programs, including one called “Foodborne Diseases Active Surveillance Network” or “FoodNet.” (FoodNet also includes several state health departments as additional collaborators.)
Some analogies have also been made between the proposed CFPA and the existing Consumer Product Safety Commission (CPSC). Since the CPSC is arguably a model for the proposed new CFPA, it is interesting to look briefly at the CPSC’s recent history. In January 2009, a coalition of consumer advocacy organizations wrote President Obama, urging him to nominate a new CPSC chair so that the Senate confirmation process could begin promptly. (Commissioner Nord had been serving as the CPSC’s Acting Chair since July 2006.) That January 2009 letter to President Obama also referred to the CPSC as being “underfunded and understaffed for too long.” In May 2009, when the President announced his intent to nominate a new CPSC chair and a new CPSC commissioner, Consumers Union indicated its support of these two nominees, who would be joining a “beleaguered but vital agency” that “has been chronically underfunded.” CPSC Chairman Tenenbaum, herself, recently acknowledged in testimony before the U.S. House of Representatives’ Subcommittee on Commerce, Trade, and Consumer Protection that the CPSC’s staff size in 2008 was less than one-half of its staff size in 1981, and that “years of budget cuts severely impacted the Commission’s ability to modernize or, in some cases, even maintain its basic infrastructure,” resulting in some calling the CPSC a “teething tiger.” After considering the broad mandate of the CPSC, and the immediate and obvious impact unsafe consumer products have on the general population, and comparing this to the less immediately obvious effects of “unsafe” consumer financial services products, one wonders how the proposed new Consumer Financial Protection Agency could be adequately financed and structured upfront to avoid some of the difficulties the CPSC has coped with over the last 20 years or more.
The U.S. Constitution also allows the President to make so-called “recess appointments”– and thereby bypass the need for Senate confirmation – whenever the Senate is in recess. If a recess appointment is made in the middle of a Congressional session, it may last until the end of the following session – thus, an individual could potentially serve for up to two years without Senate confirmation. For example, the Consumer Product Safety Commission web site lists a total of 25 commissioners who have served on the CPSC during its history, including three recess appointments (one of which elevated Commissioner Scanlon to the position of CPSC Chair in 1985). The proposed new Consumer Financial Protection Agency would inevitably be subject to the occasional Presidential recess appointment.
Food and product safety regulators also have a very useful tool at their disposal that may not have a good counterpart in the consumer financial services world: the product recall. Food and product safety regulators do not generally dictate the specific appearance, design, or content of the products they regulate, and instead generally allow market-driven product innovations (subject to baseline safety requirements). If unforeseen safety issues are discovered after a product is made available to the public for consumption, federal regulators rely heavily on voluntary product recalls. Many (perhaps most) financial services products are not easily “recalled” or returned. In most instances, financial services products are creatures of contract, and contractual obligations cannot normally be unilaterally undone. How should a consumer “return” (for example) an “unsafe” line of credit account that has an outstanding balance on it?
All governmental agencies are subject to inherent structural weak points – some of these weak points may be unavoidably embedded in the agencies’ framework (including weak points that arise from reliance on political appointees and/or funding from regulated entities). Other weak points may be specific to the types of entities, products, or services sought to be regulated. The proposed new Consumer Financial Protection Agency would not be immune from the same types of organizational weaknesses experienced by other Executive Branch agencies. Special care should be taken so that the CFPA is not hobbled from the start by readily foreseeable systemic issues.
Elizabeth Yen is a partner in the Connecticut office of Hudson Cook, LLP. Basis Points readers can reach Elizabeth at 203-776-1911 or by email at eyen@hudco.com.