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Published: February 2010

Financial protection agency could stop next recession

Coalition: Financial Reform

In coalition with a large number of organizations, Consumer Action sent a letter to Senator Dodd asking for his continued support of the Consumer Financial Protection Agency.

Below is the full text of the letter:

We are writing today to convey our strong support for comprehensive regulatory reform, and to reaffirm our view that reform must include certain crucial elements.  We look forward to working with you to craft, and to pass, legislation that will increase transparency, accountability, and fairness, and protect us all from the job loss and economic devastation of another financial crisis. 

AFR supports an independent Consumer Financial Protection Agency (CFPA) that will create fair rules of the road for financial products by cracking down on the abuses and deceptive practices of credit card companies, preventing brokers and lenders from tricking borrowers into loans they can’t afford to pay back, and protecting consumers from deceptive and unfair products and confusing contracts.  The CFPA would streamline the currently fractured regulatory system in which seven federal agencies oversee almost 20 different laws.  The CFPA must have independent rulemaking authority, an independent budget not solely dependent on appropriations; examination and enforcement authority; presidentially-appointed leadership, its own staff, and the ability to make decisions independently and not subject to veto; jurisdiction over both banks and non banks; and it must not be subordinate to any other bank regulatory agency or agencies.  A CFPA inside a prudential regulator would not meet this standard. 

To truly end "Too Big to Fail" and crack down on the reckless behavior of the biggest banks, we need strong, specific preventative measures such as leverage limits, capital and margin requirements, limits on counterparty exposures, a ban on proprietary trading and limits on bank size through a low cap on total liabilities.  Americans for Financial Reform also supports re-imposition of Glass-Steagall type divisions between commercial and investment banking in order to protect Main Street banks from the inherently volatile, reckless gambling of Wall Street.

To prevent another bailout, we need to extend the government's resolution authority -- currently limited to FDIC-insured banks -- to cover non-bank financial companies, as well. A procedural hurdle like Senators Warner and Corker's proposed bankruptcy-first presumption, will allow Too Big to Fail banks to delay during a crisis and hold the taxpayer hostage again.  Only swift government resolution authority that is funded in advance by assessments on the biggest banks will allow America to avoid another season of bailouts.

Nowhere was the catastrophic breakdown in our financial system more blatant than in the system of issuing credit ratings for securities—a dilemma echoed by dozens of economists, regulators and Members of Congress in the media and at congressional hearings.  The conflicts of interest inherent in the "issuer pays" business model have corrupted the basic mission of credit rating agencies, which are subject to weak regulatory oversight and provide insufficient data, assumptions and methodologies behind their ratings.  To address these weaknesses, we believe that the following elements should be included in legislation: establishment of an independent ratings clearing house to make rating assignments; reduction of reliance on ratings on a case by case basis; increasing SEC authority, particularly with regard to anti-fraud authority and post-rating surveillance; requiring greater transparency and improving governance practices by requiring representation for credit ratings users on rating agencies’ boards of directors; ensuring accountability through expanded legal liability; and establishing a universal rating scale for municipal and corporate bonds.

Effective regulation of the derivatives markets is likewise crucial to our future economic stability. Standardized futures, swaps, and derivatives must return to clearing and open exchange trading to provide adequate risk protection for counterparties and the financial system, as well as price discovery for users of these transactions. Financial "innovation" to exploit loopholes poses systemic risk, and for this reason AFR does not advocate any exemptions to regulation of derivatives; however, to the extent that any exemptions are enacted to protect corporations that use derivatives, they should be restricted to bona fide commercial hedging of physical commodities by end-users, so that they do not permit hedge funds, private equity firms, exchange traded or index funds, and other commodity speculators to avoid regulation.  It is also crucial that federal regulators be given full authority to set and enforce position limits, including across-market aggregate position limits, and limits on activity on foreign boards of trade that allow U.S. access.   Position limits are critical to preventing excess speculation from flooding into commodity markets – as occurred last summer – and driving another economically devastating energy price bubble.  

Protections for average investors have suffered years of neglect, leaving investors with inadequate disclosures regarding the investments they purchase, and inadequate protections in their dealings with investment professionals.  The latter is particularly troubling given the high degree of trust investors place in the brokers, financial planners and investment advisers they rely on when planning for retirement, saving for college, and other major life expenses. 

Unfortunately, some of these investment professionals have proven all too willing to abuse their position of trust.  The draft bill includes a strong set of proposals to address neglected investor protection priorities, most importantly by imposing a fiduciary duty on all those who provide investment advice to act in the best interests of their clients and restricting industry use of forced arbitration agreements.  Unfortunately, the fiduciary duty in particular has come under attack by brokers and insurers using misinformation and scare tactics to try to preserve the anti-investor status quo.  We urge you to ignore these self-serving industry arguments and act instead to protect investors who have suffered devastating losses in the financial crisis and who need and deserve the protections included in the draft bill. Financial oversight has failed to keep up with the realities of the marketplace, characterized by globalization, innovation and the convergence of lending and investing activities. As President Obama said during the campaign, “We need to regulate institutions for what they do, not what they are.” 

This means that private investment funds, including hedge funds, private equity and venture capital, and their managers, should be subject to more stringent oversight. New regulations should, at minimum, require greater transparency and ensure that managers act in the best interests of investors.  Managers of private equity and hedge funds must be registered with the SEC as investment advisors, and the SEC must have the power to regulate the funds themselves and require disclosures to investors and the public. 

Robust and effective shareholder oversight requires not only strengthened government oversight by the  SEC, but also demands that shareholders – the owners of America’s corporations – have the tools necessary to hold management and boards accountable from inside the company.  This is a necessary, market-based complement to the external regulatory efforts of the SEC.  The draft bill takes important steps in providing meaningful shareowner oversight of management and boards.  Importantly, the draft clarifies that the SEC has the authority to engage in rulemaking on proxy access, the process through which shareholders are given a meaningful voice in exercising their right to vote for board members.  The draft also would give shareholders an advisory vote on executive compensation, another critical reform. AFR strongly supports the inclusion of these corporate governance provisions in the reform bill.

Senator Dodd, we appreciate the enormity of the task that faces you, the Senate Banking Committee and the entire Congress and Administration in seeking to reform our deeply flawed financial regulatory structure.  An out of control cycle of deregulation, and the excessive influence of the biggest banks and Wall Street firms were fundamental sources of the financial crisis that has devastated our economy, cost millions of jobs, millions of homes, and trillions in retirement savings.  We are convinced that the American public strongly supports financial reform that will change the rules, and hold Wall Street accountable, and your leadership is crucial to accomplishing this goal. 

All the organizations support the overall principles of AFR and are working for an accountable, fair and secure financial system. Not all of these organizations work on all of the issues covered by the coalition or have signed on to every statement.

Lead Organization

Americans for Financial Reform

Other Organizations

Click here to see the full list of coalition members on the Americans for Financial Reform website

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