A little over one year ago Congress overwhelmingly passed the Wall Street Reform and Consumer Protection Act, more commonly known as Dodd-Frank. Though many parts of the bill are controversial, none has sparked more debate than Title X, which created and authorized the new Consumer Financial Protection Bureau.
In evaluating some of the claims made by supporters and detractors it is important to review the history of new regulatory agencies and remind ourselves of the prevailing mood at the time of the bill's enactment.
Prior to creation of the CFPB there were at least eight separate major federal regulatory agencies with oversight over financial services. Each of the eight was created following a perceived or real financial crisis, and each was designed to fix that crisis. So when the nation emerged from the grips of a financial crisis of the magnitude of the last one, creation of a new regulatory agency seemed inevitable. Moreover, there was a widespread perception, and significant anecdotal evidence, that the crisis was caused in part by financial products being created, marketed, and sold with minimal regard for the well-being of consumers.
Further, the existing regulatory bodies were perceived to have either been distracted or unconcerned about the welfare of consumers. It was not at all surprising therefore that Congress would create an agency that would focus primarily on the financial welfare and protection of consumers.
In some ways the CFPB is similar to other financial regulators, but in other ways it is quite different and in a few ways it is startlingly so.
Like other federal financial regulators, the CFPB was given a crisp and concise mandate. It was also given a title that identified its intended role and purpose with the presumed intent of enhancing its appeal to the public and therefore to Congress. What combination of words would have greater appeal than juxtaposing the words "consumer" and "protection?" Finally, the head of the bureau was to be appointed by the President and confirmed by the Senate.
The two most notable differences between the CFPB and other regulatory bodies are the unusual and unprecedented funding mechanism provided and the extent of the powers authorized for the director. Many, but not all, regulatory agencies receive their primary funding through the Congressional authorization/appropriation process following recommendations from the Office of Management and Budget. As such, the agencies compete with all of the other budgetary priorities of the federal government. Even certain agencies that generate fees significantly in excess of their total expenses (the SEC, for example) still are at the mercy of the Congress to provide their funding.
The banking agencies receive funding outside the appropriation process but in a variety of ways. FDIC funding comes from the fees generated through deposit insurance. The Office of the Comptroller of the Currency receives its revenue from bank assessments. The Federal Reserve System generates its revenue through the creation of money in the reserve banks and the interest on resulting reserve balances. The Public Company Accounting Oversight Board is funded by fees levied on all publically traded corporations. But each of these three has governance mechanisms that spread the determination of how monies can be spent. The Fed, FDIC, and PCAOB are led by chairmen and governed by board members independently appointed by the president. In addition, the PCAOB's budget requires approval by the SEC Board before funding can be initiated.
The CFPB has a very advantageous funding mechanism, with considerably less oversight than most regulatory bodies. The CFPB's funding, which is paid in quarterly installments, is an initial 10% of the operating budget of the Federal Reserve System, rising to 12% by 2013. But the determination of how the CFPB spends those funds, estimated to be $500 million in the first year, is the sole responsibility of one person: the director of the bureau.
Further, the full powers of the bureau are all delegated to the director, including appointment of all personnel, appointment of a Consumer Advisory Board and issuance of regulations implementing consumer statutes. With few exceptions, these decisions are not subject to approval by either a board or other oversight mechanism.
In sum, the powers of the CFPB director exceed any concentration of authority of any other head of any financial regulatory agency or bureau.
Not surprisingly, this governance construct has generated controversy. Those who are pleased with the current arrangement are fighting to keep it. They view, accurately, any diminution of power as weakening the agency. Opponents of this arrangement state that this is an unparalleled concentration of authority in one regulator (also true) and wish to see it scaled back or eliminated entirely.
What is likely to happen?
Expect a compromise that will please very few. It is hard to believe that many members of Congress running for reelection will support the repeal of a regulatory entity designed to "protect consumers."
On the other hand, that sort of a concentration of authority is unlikely to stand over multiple changes in administrations. Look for the single "director" to be replaced at some point by a board, which would require its re-designation from an executive agency to a commission.
Mark W. Olson has served as a Federal Reserve Board governor, chairman of the PCAOB and chairman of the American Bankers Association. He currently serves as co-chairman of Treliant Risk Advisors LLC and can be reached at firstname.lastname@example.org.