Stated objectives of the Administration's plan to restructure regulation of the financial services industry published last week include promoting "robust supervision" of financial institutions and "protecting consumers and investors from financial abuse." The changes proposed to meet these objectives will subject the consumer financial services industry to new regulations and regulatory agencies. Expect far-reaching legal and economic consequences.

New Sheriff in Town: The Consumer Financial Protection Agency. The proposed reforms include creation of the Consumer Financial Protection Agency (CFPA), a new regulatory agency intended to be "single primary federal consumer protection supervisor." Its mission would include protecting consumers of "credit, payment and other consumer financial products and services" from "abuse, unfairness, deception or discrimination and regulating such products and services."

As new primary federal regulator, the CFPA would have sole authority to promulgate and interpret regulations under existing consumer financial services and fair lending statutes, such as the Truth in Lending Act, Home Ownership and Equity Protection Act, Real Estate Settlement and Procedures Act, Community Reinvestment Act, Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and the Fair Debt Collection Practices Act.

This would represent a major change in consumer financial service regulation, which is currently dictated largely by the agency regulating the institution providing the service. This in turn depends on how the institution is chartered. For example, the Office of Thrift Supervision ("OTS") an agency within Treasury, currently supervises savings and loan associations, including their compliance with consumer law. The plan states that creation of the CFPA as primary regulator is intended to prevent federally supervised institutions from "choosing [the institution's] supervisor based on any consideration of real or perceived differences in agencies' approaches to consumer enforcement." The proposal calls for elimination of the OTS, which, along with other existing federal banking regulators, has been widely criticized for a gap-filled and at times lax regulatory scheme that contributed to the subprime mortgage mess. The SEC and CFTC would keep their regulatory authority, although the proposal wants to see their regulations harmonized.

In addition to having sole rule-making authority for consumer financial protection statutes, the CFPA would:

  • have supervisory, examination and enforcement authority and jurisdiction over all persons covered by the statutes that it implements;
  • create a "floor" for consumer protection with the CFPA's rules overriding weaker state laws but leaving states free to enact stronger measures;
  • coordinate enforcement efforts with the states;
  • collect empirical data, receive complaints, and provide financial education to consumers;
  • have authority to restrict or ban arbitration clauses in certain contexts, such as mortgage loans; and
  • leave "backup authority" with the Federal Trade Commission, while transferring primary authority for financial product and services protections to the CFPA.

Increased Disclosure Regulation: "Clear and conspicuous" gives way to "clear, simple and concise". The plan also recommends legislative and regulatory changes to "reform consumer protection based on principles of "transparency, simplicity, fairness, accountability and access for all" and "a proactive approach to disclosure" in order to improve "transparency" of consumer product disclosure.

Proposed legislation includes requiring all mandatory disclosure forms to be "clear, simple, and concise," and requiring providers to "test" the forms regularly. This change alone could have a massive economic on the consumer financial service product industry. Widely used forms have developed and passed muster as compliant with existing extensive regulations under TILA, RESPA, and other consumer protection statutes (many of which already require "clear and conspicuous" disclosure), as well as developed case law. Forms will have to be reevaluated under the new principles, "tested," and possibly revised at great expense. If regulations as to form content are specific, companies will have to invest in developing new forms and training to use them (what does "access for all" really mean in a disclosure?).

New regulation for the Credit Card Banks. The proposal would in effect end "special purpose" credit card banks. Currently, companies owning a credit card bank can avoid the restrictions of the Bank Holding Company Act, and thus engage in commercial activity without supervision and regulations. This allows the holding company to use its credit card bank to offer private label cards to retail consumers, while its bank charter protects it from state usury laws, providing them with a competitive advantage. The proposal views this as a loophole creating a "supervisory blind spot," since the Federal Reserve does not supervise the credit card bank holding company. Under the proposal, companies holding credit card banks would no longer be exempt from regulation under the Bank Holding Company Act.

Insurance Regulation. The plan includes a proposal for the establishment of an Office of National Insurance ("ONI"). The ONI is slated to be responsible for "monitoring all aspects of the insurance industry," to gather information and "be responsible for identifying the emergence of any problems or gaps in regulation that could contribute to a future crisis." The ONI is also expected to recommend to the Federal Reserve Board any insurance companies that should be supervised as Tier 1 FHCs (defined as "[a]ny financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed"). The proposal is that Tier 1 FHCs should be subject to "robust consolidated supervision and regulation, regardless of whether the firm owns an insured depositary institution." The Federal Reserve Board is proposed to be given the authority to supervise and regulate Tier 1 FHCs. In addition, the Treasury Department is proposed to play a substantial role to "modernize and improve our system of insurance regulation."

If brought to fruition, the administration's proposal will mean that financial service providers who have spent years and substantial sums learning what their regulators want and developing procedures to comply with current consumer regulations will essentially have to start over under new rules, new requirements, and new regulators. The cost of these changes will likely lead to shakeups in the industry for years to come.