It's about time banks stop whining about increased regulation and do something to get ahead of it.
Complaining about regulation is nothing new in banking. But in the wake of Dodd-Frank and the creation of the Consumer Financial Protection Bureau, the crankiness has reached an all-time high.
Exhibit A: An op-ed in last week's Wall Street Journal by bank analyst Meredith Whitney blaming regulatory reform for reducing access to essential banking services and increasing the ranks of the unbanked.
Whitney takes aim at the CARD Act and overdraft protection reforms, and she warns lawmakers to "subject to heightened scrutiny anything forthcoming from the newly established Consumer Financial Protection Bureau."
The fact is, millions of Americans were less than fully embraced by the banking system long before the financial crisis and resulting re-regulation.
Free checking, for instance, may have opened the door to the banking system for underserved consumers, but at a steep price. They paid more than their share in overdrafts, essentially subsidizing the system for everyone else.
Financial access is critical for household stability and economic prosperity, but only if it opens the door to high-quality products and services.
The new UDAAP standard was built on this idea. Products and practices that have gotten a pass from the regulators for decades are now being scrutinized through a fairness lens.
Regulators appear to be in the process of defining fairness one product and one exam at a time. The lack of a regulatory bright line and the uncertainty that creates is certainly challenging for financial institutions.
What should banks do about it? They can continue to whine and complain publicly about regulation, further alienating themselves from their customers and reinforcing the impression that they have learned nothing from the financial crisis. In fact, the less trust the public has in banks, the more pressure there will be to regulate further, creating a self-reinforcing cycle that ultimately can stifle positive financial innovation.
Another option for the industry is try to get ahead of the uncertainty by working to define fairness and demonstrating a commitment to consumer-friendly practices. Meaningful self-regulation can be a powerful way for industry to remind the public what it stands for and to inspire trust among customers, especially after a negative incident.
Consider the 2007 fiasco when JetBlue Airways left passengers stranded on the runway for 11 hours during an ice storm at New York's JFK airport. The incident dominated the media and caused outrage among both consumers and policymakers, who began calling for added regulation. Less than a week later, JetBlue created its own Customer Bill of Rights, a policy "dedicated to bringing humanity back to air travel."
Seeing few if any similar self-regulation efforts by banks in the wake of the financial crisis, my organization decided to kick-start the process. Our manifesto, the Compass Principles, encourages the U.S. financial services industry to commit to positive practices that actively contribute to improving people's lives and deliver sustainable value to both consumers and providers. The principles define good practice and are meant to guide the design and delivery of the financial products consumers use to transact, save and borrow:
Embrace inclusion: Responsibly expand access.
Build trust: Develop mutually-beneficial products that deliver clear and consistent value.
Promote success: Drive positive consumer behavior through smart design and communication.
Create opportunity: Provide options for upward mobility.
The Center for Financial Services Innovation has begun convening advisory councils comprised of financial services providers, consumer advocates and others to translate the principles into more granular best-practice guides for specific products and services.
We also have begun recruiting financial institutions that are ready to publicly commit to adding or changing their products and practices in ways that are consistent with the principles.
The principles and best practice guides are meant to be aspirational and encourage a competitive race to the top, building on a floor created by strong regulation. They are meant to demonstrate how companies can serve consumers responsibly and make money doing so.
Regulators have a role to play too. More than ever, the economy needs positive financial innovation that can help consumers rebuild their balance sheets and their credit histories. Regulatory agencies can help encourage that innovation, in partnership with financial institutions, by offering safe harbors or other waivers for pilot tests of new products and services that offer consumers an onramp to financial rehabilitation.
Someone is going to have to define fairness. Rather than sit back and wait for the regulators to do it, the banking industry should channel its frustrations into coming up with some reasonable definitions and implementing them for all to see. Ultimately, banks that can demonstrate they are doing right by their customers will have nothing to worry about.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation.