Expanding the 'Patchwork' Regulatory System

Is the U.S. consumer financial services oversight system as flawed as Michael Barr, the Treasury's assistant secretary for financial institutions, told legislators?Perhaps it is. But I still wonder why creating yet another layer of bureaucracy is supposedly better than having an existing agency (like the FTC) take on a stronger role in safeguarding consumers in the financial services world. Wasn't having a "patchwork" regulatory system with many agencies one of the main gripes of lawmakers? How is adding yet another "patch" (the consumer watchdog agency) going to alleviate the problem? Congress claims this group will be dedicated to only overseeing consumer issues in this one particular industry. But where is the expertise going to come from?

As Todd Zywicki, a law professor at George Mason University told me in an interview, this is something the FTC can do in its sleep. "Entities like the FTC have long-standing expertise and the institutional apparatus to think about how consumers use information and shop for products," he says.

And just how will offering "plain vanilla" products help consumers? I agree that the verbiage in mortgage documents and credit card agreements should move away from legalese. How about mandating that they be written in "plain English?" That probably would alleviate some of the problems that led to the credit crisis where some consumers truly might not have understood what they were getting into. At the same time, will consumers really benefit if all banks offer pretty much the same products? One could argue that there is a degree of commoditization in financial services, more so in some product areas than others. However, if what's being proposed in Washington fails to take into account the importance of competition-not only to the banks, but to the consumers-where is the benefit? People like to shop around for the best deal, whether it's for a car, a TV or a mortgage. Just how "plain vanilla" will these products become?

The fight between Congress/consumer groups and the financial services industry continues to rage in Washington over the final version of the proposal for the agency. However, with the FS industry suffering from a severe PR problem, I wonder just how much clout it will be able to exert in shaping the legislation.