At a minimum, reform must achieve these critical objectives:
- It must provide substantial new protections for consumers and investors.
- It must create a more stable, safer financial system, one less prone to crisis.
- And it must safeguard American taxpayers from having to bear the costs of battling future crises.
Geithner made clear that, in order to achieve these objectives, the regulatory overhaul will require changes throughout the entire financial system.Â Toward this end, the Obama administration has proposed:
- strengthening standards for investment advisors and brokers while expanding SEC authority over disclosure and enforcement,
- closing gaps and loopholes that encouraged games-playing and enabled firms to evade strong government oversight,
- requiring registration of hedge funds,
- regulation OTC derivatives markets, and
- imposing tighter constraints on leverage of financial institutions.
A key part of the Administration's reforms remains the creation of a Consumer Financial Products Protection Agency (CFPA), which will write rules, oversee compliance, and address violations by non-bank providers, as well as banking institutions, and will take consumer authorities spread across many agencies and combine them in one place.Â Geithner said that he does not envision the CFPA imposing additional regulatory burdens on financial entities, but merely better coordinating rulemaking and enforcement:
Consumer protection cannot be reformed without addressing these structural problems. Our proposal will address them directly. It will consolidate fragmented consumer authorities into one agency, the Consumer Financial Protection Agency (CFPA), which will write rules, oversee compliance, and address violations by non-bank providers, as well as banking institutions.
Effective protection requires consolidated authority to both write rules and conduct oversight and enforcement.
Combining these authorities will ensure that the agency has a wide range of tools to address any problem within its domain, and can choose those that are most effective and impose the least burden.
. . .
If enforcement and supervisory authorities remain divided among the agencies as they are today, we will continue to see regulatory inertia and arbitrage, uneven protection, and eroding standards.Â Just as importantly, a rule-writing agency that does not receive information from and examine institutions and address their violations will not understand how institutions operate and the burdens that regulations put on them.Â Such an agency will likely underestimate the costs of regulation and fail to get the balance between costs and benefits right.
. . .
Moreover, the CFPA will allocate its oversight resources on the basis of risk to consumers.Â Firms that pose less risk to consumers will face proportionally less burdensome oversight.
It is clear that the Administration intends to move ahead with its plans to propose a new consumer protection agency for financial products, and sees the proposed agency as central to financial reform efforts.
The full text of Secretary Geithner's September 23, 2009 testimony is available at: http://www.ustreas.gov/press/releases/tg296.htm