The Obama Administration hasn't revealed its plans for overhauling financial regulation, but one proposal is getting a lot of attention — the creation of a new agency to oversee consumer financial products — a job currently shared by the Fed, the SEC, the CFTC and others. Consumer advocacy groups like the idea; the industry and some regulators don't.
“I will say that I would question pretty profoundly any model that would try to move investor protection functions out of the SEC,” said SEC Chairman Mary Schapiro at a May 20th open meeting, in response to questions from reporters.
The model the Administration is apparently favoring was initially touted by Elizabeth Warren, the Harvard Law professor who is also head of the Congressional Oversight Panel created to monitor the U.S. banking bailout. Her recommendation, outlined in Harvard Magazine in May 2008, is a Financial Product Safety Commission (FPSC) — much like the Consumer Product Safety Commission, the independent federal agency that regulates the safety of some 15,000 consumer products Americans use daily. The FPSC would set guidelines for consumer disclosure and collect and report data about the uses of different financial products like mortgages, credit cards, car loans, life insurance and annuity contracts, even mutual funds.
Despite Schapiro's pleas, it's safe to say that recent failures of the current regulatory system have undermined public confidence in it. Both FINRA and the SEC were unable to stop Bernard Madoff — despite repeated warnings — from stealing millions over many years. And the SEC changed the leverage rules that led to reckless levels of debt at investment banks; now two of the SEC's attorneys are being investigated for insider trading.
In the end, some sort of substantial reorganization is probably in everyone's interest. “There's a crisis of confidence with investors. They don't trust Wall Street and they don't trust the regulators,” says Bill Singer, a securities attorney, vocal critic of industry regulation and contributor to this magazine. “But also within the industry, participants don't know who's regulating what,” he says. “This new commission could be a bitter pill for the industry but it would probably also be good for it.”