Sweeping new rules proposed in response to the economic meltdown weigh demands of financial system and consumers
Blaming much of the current economic downturn on "the unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess," President Barack Obama is proposing a vast expansion of federal regulatory power over financial institutions. The plan includes the creation of two new entities—a Financial Services Oversight Council and a Consumer Financial Protection Agency—as well as two new overseers of banks and insurance firms.
The proposed new regulatory scheme includes new supervisory powers for the Federal Reserve for all financial institutions whose problems could pose a threat to financial stability and a requirement for hedge funds and other pools of private capital to register with the Securities & Exchange Commission. The sweeping nature of the proposals—the widest-ranging changes to the financial regulatory system since the Great Depression—is generating pushback from business interests over some of the provisions.
Obama describes the changes as a balancing of the interests of business and the public. "With the reforms we are proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly, without the fragility in which normal business cycles bring the risk of financial collapse; a system that works for businesses and consumers."
The proposed eight-member Financial Services Oversight Council is to be chaired by the Treasury Dept. and is designed to "help fill gaps in regulation, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities," according to fact sheets distributed by the White House. It will replace the President's Working Group on Financial Markets and have a permanent staff at Treasury.
Regulating Consumer Services
The new Consumer Financial Protection Agency will regulate providers' consumer financial products and services, including credit, savings, and payment services. It will set standards for promoting financial services to consumers and have regulatory powers to supervise institutions for compliance.
"This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want—and actually understand," Obama said. "Consumers will be provided information that is simple, transparent, and accurate. You'll be able to compare products and see what is best for you. The most unfair practices will be banned. Those ridiculous contracts—pages of fine print that no one can figure out—will be a thing of the past. And enforcement will be the rule, not the exception."
The plan would do away with the Office of Thrift Supervision, replacing it with a system aimed at closing gaps in coverage and keeping institutions from shopping for the most lenient bank regulator.
"The Appropriate Balance"
Christina Romer, chairman of the White House Council of Economic Advisers, said the Administration proposal strikes "the appropriate balance" and that it was "not bulldozing the whole system."
Representative John Boehner (R-Ohio), the Republican leader in the House, countered by predicting "we'll have the federal government deciding what interest ought to be charged on credit cards, having the government decide what kind of financial products are available."
The Financial Services Roundtable—a trade group for the financial-services industry—said in a statement that it "applauds the Administration's announcement of a proposal for modernizing regulation of the financial-services industry. Our economic recovery depends on these reforms. The Roundtable has long advocated regulatory reform and believes reform must be comprehensive, creative, and bold."
However, the group said it is opposed to the Consumer Financial Protection Agency because it separates the regulation of the institution from the regulation of the products. "Each regulator will only have half the information," the group said, adding that the possibility of individual state regulation will promote a confusing patchwork of rules.
The U.S. Chamber of Commerce said the plan adds regulation without dealing with the root dysfunction in the system. "While the Administration has made several positive recommendations, we're concerned that overall, the proposal simply adds to the layering of the system without addressing the underlying and fundamental problems. We can't simply insert new regulatory agencies and hope that we've covered our bases," David Hirschmann, president and CEO of the Chamber's Center for Capital Markets said in a statement.
Critics of the plan also argue that it imposes too many restrictions that will harm the ability of U.S. financial companies to compete in the global economy.