The Consumer Financial Protection Agency Act and financial regulation reform

Consumer Financial Protection Agency

This year was one of the most economically difficult periods of the past recent decades. The buzzword became crisis, as in the real estate and credit crisis which emerged within the United States and soon expanded to the multitude of U.S.' business and trade partners, to eventually impact all parts of the globe. The direct result of the situation created has materialized in the emergence of numerous lessons relative to financial operations. Examples of such lessons include the necessity for prudence or the necessity for increased levels of control.

What the United States has learned from the recent crisis is that it remains a great international power, with an ability to influence the rest of the world. Given this realization, it was necessary for them to commence a complex process of economic revival, and hope that the impacts upon the rest of the global locations would be among the most positive ones.

The Consumer Financial Protection Agency Act is a newly launched endeavor towards the creation of a national agency that would regulate the actions and decisions of banking institutions in the meaning of setting new standards for mortgages, restricting or even forbidding risky loans, investigating financial institutions and enforcing laws that protect credit card consumers (Andrews, 2009). All in all, the aim of the act is that of protecting the customers requesting financial services. The responses to the proposition forwarded to the Senate by the Obama Administration were conflicting, with some parties arguing the benefits of the new act, other presenting its limitations, whereas a third set of individuals chose to remain aside and neutral.

The aim of this report is to assess the Consumer Financial Protection Agency Act in terms of problems it could solve and problems it could itself raise. In order to achieve this desiderate however, it is first necessary to assess the current consumer protection relative to financial services. After these two analyses are completed, the report looks at the measures which could be implemented by Citigroup to avoid the implementation of the new act.

2. The Current System of Consumer Protection in Financial Services

A discussion on the current means in which the buyer of financial products and services is being protected under the law is difficult to commence. This is for the simple reason that the legislation naming such a supervisory system, its rights and obligations, is extremely ambiguous. As a result, there are several agencies which state to protect the right of customers. It has to be noted however that the actual well-being of the customer, in its essence and understood as an organization which would be exclusively in charge of protecting the rights of financial consumers, does not currently exist. What does exist however is an agglomeration of institutions which develop, implement and safeguard financial policies, and which, amongst other responsibilities, are also in charge of costumer protection. The following lines present some institutions which form the current regulatory system in charge of customer financial protection:

- the Federal Reserve System, with a multitude of its boards, member banks and advisory committees

- the Office of the Comptroller of the Currency Administrator of National Banks at the United States Department of Treasury

- the House Committee on Financial Services or - the Federal Deposit Insurance Corporation

3. Criticisms of the Current Regulatory System

It is without any doubt that the current system for protecting the rights of financial customers is flawed. The best evidence in this sense is the credit crunch which almost brought an end to the American economy. The major flaws in the system are succinctly revealed below:

1. The current regulatory system is not unified and united, meaning that the institutions in charge of protecting customers are unable to perform at their maximum potential, revealing as such poor levels of customer protection and breakages within the financial markets.

2. The trigger of the internationalized economic crisis was constituted by the credit crunch, which was directly linked to mortgages and the occurrence of numerous non-banking institutions which purchased and issued mortgage-backed securities. These institutions are not however being supervised by the federal authorities and their actions often go out of the ethical and even legal sphere. Aside these mortgage brokers, there are also other non-banking institutions which offer financial products and services but are not controlled and supervised by the United States government. Such companies include consumer credit organizations or companies which offer pay-day loans. Due to the poor customer protection in terms of these institutions, they were able to offer apparently attractive products, forcing the banks lower their standards. The outcome was obvious to all of us.

3. A third problem of the current regulatory system, one which has gained momentum throughout the past years before the emergence of the crisis, revolves around the ability of banking institutions to choose the regulator that would oversee their operations. Bank managers would often seek those regulators which were most permissive and willing to turn a blind eye from time to time.

4. A fourth and foremost important problem with the current system is that it does not in itself protect the rights of the consumers. To better understand, the agencies which currently regulate the financial sector are focused on the actions of the bank, the legality of their decisions and the impact these actions and decisions will have on the bank itself; the impact on the customers is generally overlooked

5. The final problem refers to the restricted rights of the agencies currently offering customer protection in the meaning that each of these agencies generally has one right. They can either create the legislation, enforce it or implement corrective measures. This limited ability to only take one action often delays processes of customer protection, makes the agencies point fingers at each other, with the final result of limited advances. Additionally, the somewhat similar responsibilities make them rely on the belief that the other agency will implement the required action. The most relevant example might be the situation created with the sub-prime mortgages, which "took the federal banking agencies until June 2007 to reach final consensus on supervisory guidance imposing even general standards on sub-prime mortgages. By then it was too late" (Geithner, 2009).

5. Potential Concerns about the Consumer Financial Protection Agency

Despite the multitude of benefits revealed by the CFPA, commercial banks and mortgage lenders continually present their growing dissatisfaction with the act. Representatives of this side include reputable organizations such as JP Morgan Chase or Wells Fargo, as well as a series of independent mortgage brokers and mortgage lenders and local and regional banking institutions. Their most compelling reasons for the dismissal of the Consumer Financial Protection Agency are succinctly presented below:

1. The banks feel that there is no real necessity for new regulatory legislation as the economy is already showing sighs of recovery; these financial institutions feel that the resources would be better spent otherwise. Additionally, the CFPA does not introduce any real new elements, but politically enforces the lessons already learnt from the economic crisis

2. The state could abuse its power through the Consumer Financial Protection Agency in the meaning that it could impose too large and severe restrictions upon the actions of banking institutions and mortgage brokers and lenders. Such protectionist measures would generate significant negative impacts upon the profits of the financial institutions (which consequently materialize in lower taxes and as such lower incomes to the state budget), and would also restrict the consumers' access to financial products and services; it would also stifle the creativity of financial specialists and would lead to a decrease in the formation of new financial products and services

3. The financial institutions, through the mouth of the American Bankers Association, not only state that the new agency, through its regulations, would make credits less available to the general population, but also argue that it would make the credits more costly (Hall, 2009). In terms of the impact of such an outcome, the living standards of the population are expected to decrease and the economy is likely to decrease due to a restricted access to the necessary borrowed funds.

4. Finally, the bankers argue that the new regulatory system does not possess a real ability to fix the problems related to customer protection and as such avoid the potential emergence of other financial crises, but that it only "adds a new layer of regulation without fixing . . . our outdated, broken regulatory structure that was a contributing factor in our crisis" (Hall)

The concerns forwarded by commercial banks and mortgage lenders are generally founded on solid arguments, but then, so are the arguments in favor of the formation of the Consumer Financial Protection Agency. It is as such clear that the future will bring about an intense dispute over the CFPA. An interesting element however revolves around the power held by banks and mortgage institutions, as most of these remain dependent on state funds. For instance, they use the money collected by the state through taxes to offer loans, and they also request guarantees from the United States when granting loans to its citizens (Andrews). It will be interesting to see if this feature stifles the battling power of the financial institutions and what role will it generally play in the decision relative to the Consumer Financial Protection Agency.

Aside the concerns forwarded by banking institutions, there are other elements which may worry the public. For once, there is the administrative side of the CFPA. In his speech, Treasury Secretary Timothy Geithner announced that the CFPA would speed up the process of consumer protection and increase its efficiency through a decrease in bureaucracy. Nevertheless, the implementation of the CFPA raises a lot of bureaucracy. For instance, only a limited numbers of the plans included can be rapidly implemented through the executive power of the presidential administration. The rest of them require the approval of the United States Congress. At the earliest, this approval will be granted at the end of this year, meaning that the regulations in the CFPA will be enforceable starting with 2010. Therefore, the speed and efficiency of the process remain yet to be truly seen. Additionally, there is a political concern relative to the growing problems of the American healthcare system and the growing energy insufficiency. Even some members of the presidential administration feel that these needs are more impending than the financial protection of customers (Allen and Javers, 2009).

6. How Best to Advise Citigroup to go about Exerting Influence to Prevent the Passage of this Bill

Similar to JP Morgan and Wells Fargo, financial giant Citigroup is also one of the opponents of the Consumer Financial Protection Agency. In answering the challenges posed by the potential introduction of the bill, it is necessary that the managerial team at Citigroup takes a gradual, objective and clearly structured approach. The steps to this approach are revealed below:

1. First, it is necessary for the managerial team at Citigroup to assign a team of specialized economists, politics experts and lawyers to research the true features and implications of the CFPA. The company cannot rely on the information offered by the media but needs to possess its own professional insight. The research report to be handed in by the appointed research specialized has to be thorough and detailed and must be presented to the board of Citigroup. It is pivotal to comprehend all implications before launching an action against the plan of the United States President. The team that has conducted the research will be continually used throughout the process due to their expertise regarding the case.

2. The next stage of the opposition process is that of communicating with the other representatives of the financial sector. In this order of ideas, the Public Relations team at Citigroup would organize individual meetings between the top executives at Citigroup and the executives of other large financial organizations, such as JP Morgan or Wells Fargo. The Citigroup representatives will engage in open communications to identify the stand of its otherwise competitors, but now potential allies. It is generally expected that most financial institutions side with Citigroup.

3. With the completion of the individual meetings, a general meeting will be held and it will include all top executives of the financial institutions. The outcome of this gathering will be the signing of a document contesting the formation of the Consumer Financial Protection Agency. The document will be objective, highly documented and will include all fears of bankers related to the new act; it will follow all procedures and it will be sent to the United States Senate as well as the United States Presidential Administration.

4. Considering that the previously mentioned course of action has not retrieved the desired outcome, the next step is that of making use of the company's connection with the lawmakers. This business procedure is seldom discussed in open conversations, being generally considered a taboo subject in business communications. Nevertheless, it is a common fact that Citigroup, as well as most other corporations, have, along the years, financially sustained candidates to political functions. Some of these former candidates are now in high positions and have the ability to influence the lawmaking process. Given this situation, Citigroup is advised to look over its sponsorship documents and identify which current politicians have been supported by the company. It should then identify the current positions of those politicians and their ability to influence the lawmaking process. They must then approach these politicians and present their case against the CFPA, requesting their support.

5. Finally, the last stage of the campaign against the Consumer Financial Protection Agency would revolve around the communications with the public. The general perception is that the CFPA will be implemented as it is in the best interest of the public and because the public desires its adoption. This very same public however can constitute a major reason against the decision to create the CFPA. In this order of ideas, the managers at Citigroup could order the creation and airing of a media campaign to convince the public of the negative impacts of the consumer protection agency. It is however advisable for the campaign to not only be aired under the aegis of Citigroup, as such an endeavor would be publicly perceived as an individual effort to safeguard organizational revenues, but it is advisable for it to promote the united stand of the entire banking sector. The media campaign should focus on the negative impacts of increased regulation, with generally reduced access to funds and more expensive credits as the main forces which influence customer decisions.

References:

Allen, M., Javers, E., Barack Obama to Create Consumer Financial Protection Agency, Politico, 16 June 2009, http://www.politico.com/news/stories/0609/23790.html last accessed on September 30, 2009

Andrews, E.L., Banks Balk at Agency Meant to Aid Consumers, New York Times, June 30, 2009

Geithner, T.F., Written Testimony of Treasury Secretary Timothy F. Geithner, House Financial Services Committee, Financial Stability, http://www.financialstability.gov/latest/tg231.html last accessed on September 30, 2009

Hall, K.G., Banks Fight to Kill Protection Agency, McClatchy, September 24, 2009, http://www.mcclatchydc.com/227/story/75997.html last accessed on September 30, 2009