Senate Nears Deal, Consumer Protection At The Fed

Fed Chairman Ben Bernanke may take the reins of consumer protection if the most recent regulatory reform proposal makes it to the Senate floor.

The Fed may take the reins of consumer protection if the most recent regulatory reform proposal makes it to the Senate floor.

Circulated Monday by Chris Dodd, Senate banking committee chairman, the latest proposal would house a semi-autonomous consumer protection agency inside of the Federal Reserve, according a story in the Financial Times. That agency would have some rule-making powers. Dodd has been trying for weeks to gain Republican support for the legislation, and lately has been negotiating closely with Senator Bob Corker (R., Tenn.).

Washington observers predict that Dodd could introduce a final bill later this week, if he gets enough consensus on the proposal.

Initially, Dodd had proposed putting the consumer protection agency within the Treasury, while Senator Richard Shelby (R., Ga.), who is currently considering the proposal with other senior Republicans, had proposed giving the FDIC purview of such an agency. The consumer protection agency has been one of the biggest sticking points in the proposed legislation.

The Obama administration has called for a fully independent consumer protection agency, with separate regulatory powers. An independent agency is supported by Elizabeth Warren, Harvard law professor and chairman of the Congressional Oversight Panel, which oversees the government’s bail-out program. The Fed has been heavily criticized for its handling of consumer protections during the latest crisis.

The latest proposal would also allow the government to dismantle large, failing financial institutions, according to a story in The Wall Street Journal. “Regulators would have the option to force any financial company into an FIDC-controlled dissolution if they believed market chaos required such an extreme step,” the story says. “Under the proposal, this step could take place only after the agreement of the Fed’s board, a council of regulators, and the Treasury secretary, in consolidation with the president.” It would also give the FDIC the ability to give the boot to management.

So far, it looks like the new proposal may also include an amendment introduced two weeks ago by Senator Tim Johnson (R- S.D.), incoming Senate Banking Committee Chair, that would eliminate from Senate regulatory reform legislation the application of a fiduciary standard to investment advice provided by brokers. Instead, Johnson’s amendment calls for an 18-month SEC study on the fiduciary issue.

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