Washington's newest super-agency, the Consumer Financial Protection Bureau, sprang into life in July. That bureau was granted remarkable powers by Congress. Consumers and businesses alike will depend on the stability and effectiveness of the new bureau. However, Congress unwittingly may have infected the bureau with the equivalent of a latent computer virus that could damage the CFPB's ability to function, and shatter the expectations of its supporters.

That hidden defect is the vesting of the enormous bureau powers in a single person, the director. The consequences are not obvious, but enormous in their potential impact on the bureau and its ability to fulfill its consumer protection function.

The tale of another, similar federal agency, the Federal Trade Commission, an agency which has as its motto, "Protecting America's Consumers," may be an object lesson.

The FTC was given broad law-making powers (via rule-making) by the Congress in 1975. Unfortunately, the only policy guide provided by Congress was that the conduct to be prohibited by the FTC be either "unfair or deceptive." Indentifying "deceptive" acts was not so difficult. Identifying what human activity was "unfair" and should be legally prohibited was fraught with difficulties.

The FTC did what its supporters in Congress apparently wished it to do. It engaged in aggressive rule making. Within months, a congressional backlash brewed, in, importantly, a Democratic Congress. The congressional response, and a resultant new-found self restraint by the FTC, put the agency on the sidelines, not for weeks, months or years, but for decades, with respect to use of the "unfairness" doctrine for financial services agency-created law.

That congressional mistake and its impact on consumer protection are best described through the observations in 2003 of Howard Beales, at the time the director of the Bureau of Consumer Protection of the FTC. Mr. Beales noted that the FTC engaged in "unfairness" rule makings that relied upon "broad, newly found theories of unfairness that often had no empirical basis, could be based entirely upon the individual Commissioner's personal values, and did not have to consider the ultimate costs to consumers of foregoing their ability to choose freely in the marketplace. Predictably, there were many absurd and harmful results."

His comments captured one of the adverse impacts on the public. The impact on the FTC itself was even more direct and profound. Director Beales lamented that "at one point Congress refused to provide the necessary funding and simply shut down the FTC for several days, . . . Eventually, Congress acted to restrict the FTC's authority, . . . So great were the concerns that Congress did not reauthorize the FTC for 14 years. Thus, chastened, the Commission abandoned most of its rule making initiatives, . . ." The FTC, in fact, initiated and adopted no new rule in the field of consumer financial services through use of the unfairness doctrine for more than 20 years.

There are differences to be sure between the FTC of the 1970s and the CFPB, but the similarities are too profound to ignore. Both agencies have immense power to make law - that is to promulgate rules that impose restrictions on conduct - unlimited by any clear guidance by Congress. Both agencies occupy the roles of investigator, prosecutor, and judge, as well as law-maker. The CFPB has been given an additional role, that of "examiner", which gives it immediate access to business' most confidential activities, documents, and data. Congress also gave the CFPB an additional basis for law-making, that of prohibiting any conduct that the director identifies as an "abusive" act or practice. And, Congress partially disenfranchised itself by removing the bureau from the congressional appropriations process.

The FTC that was attacked by Congress for implementing a vague congressional directive was not governed by a single director. It had (and still has) a five-person commission. How much worse can a single director do in terms of angering Congress by spewing forth rules, the legal equivalent of laws, that are unacceptable to the public and to the body that ultimately bears the responsibility for setting public policy, the Congress?

Much worse. Little the bureau will do as it fulfills its consumer protection mandate will be free of costs to consumers. These costs will become highly visible to the American public, to businesses and, hence, to Congress. The most visible, the greatest cost-creating bureau function, will be, as it was for the FTC, its national law-making power, based on two malleable standards, "unfair" and "abusive."

A single director, no matter how intelligent, how well educated, how experienced, how well-meaning, and how well supported by staff, research and studies, faces limitations every human faces with respect to each of such qualifications. If the ultimate policy powers of the bureau are vested in a commission, one that consists of persons also highly qualified, important policy decisions will be informed by the multiple bases of differing experience, education and values of those commissioners. A give and take of those commissioners should result in decisions superior to those that would be made by a single director.

The CFPB director is responsible to no one. While the director will be advised by competent subordinates, the relationship of subordinates to a chief executive is vastly different than that among equal members of a collegial body. A director with four co-equal commissioners will need to convince at least two other commissioners of the public policy merits of any new rule and will benefit from the collective wisdom of all five.

There are proposals in Congress to modify the CFPB's structure to correct this problem and to adopt a commission model. The response of some Democratic Congressmen is that such would weaken the bureau. Not so. The CFPB would be strengthened by the correction of this serious flaw and might thereby avoid a Congressional backlash such as experienced by the FTC.

Roland E. Brandel is a senior counsel in the San Francisco office of Morrison & Foerster.

Editor's Note: An email sent to American Banker readers about this piece misstated the decade of the FTC's birth. The agency was established in 1914. As the story correctly states, Congress gave it broader powers in the 1970s.