Three generations ago, President Franklin Roosevelt appointed Joseph P. Kennedy to the new Securities and Exchange Commission. The president’s selection of a businessman outraged many at the time. One commentator described it as “setting a wolf to guard a flock of sheep.”
Shortly after he was appointed, Kennedy observed: “Everybody says that what business needs is confidence. I agree. Confidence that if business does the right thing it will be protected and given a chance to live, make profits and grow, helping itself and helping the country… We are not working on the theory that all the men and all the women connected with finance, either as workers or investors, are to be regarded as guilty of some undefined crime. On the contrary, we hold that business based on good will should be encouraged.” Based on that premise, Kennedy used regulation to strengthen America’s financial markets and help protect investors.
Thanks to the new Dodd-Frank reform law, for the first time ever we will have a single federal agency charged with writing the rules for all mortgages and all credit cards—regardless of whether they are issued by a federally chartered bank, a state chartered credit union, or a group of unlicensed investors.
Banks and non-bank lenders will now be subject to the same federal oversight to ensure they are playing by the same rules. The new law will also consolidate critical consumer financial protection activities now performed by seven different agencies into one agency.
And, perhaps most remarkably, the agency will not simply create new regulations, but it has the power to get rid of old ones that are outdated, expensive or just don’t work. This new framework will provide major opportunities for the financial services industry and significant relief for American families.
But the deeper issue that this agency will face is how to determine when it should act. It would be possible to move forward primarily with a “thou shalt not” approach, declaring regulations like an omniscient oracle. It would also be possible to focus primarily on adding more disclosures that would drive up costs for the industry, while giving consumers more paper to throw away.
I think we should take a different approach.
Three and a half years ago, the Financial Services Roundtable – a trade association representing America’s biggest banks — embraced a new, principles-based regulatory framework. Their first principle is “Fair treatment for consumers.” Their explanation of how to tell if that principle has been met is based on a few straightforward questions: Can customers understand the product? Can they figure out the costs and risks of a given product? And can they compare products in the marketplace?
Moving forward, the new agency should focus on the very same questions.
For consumers, this would mean products that are easy to understand and compare. For lenders, regulatory compliance costs might be reduced. Competition would flourish, but in ways that consumers can see, such as better service and lower prices.
Two weeks ago, President Obama appointed me to serve as his assistant and Treasury Secretary Timothy Geithner asked me to serve as his special advisor responsible for getting the new Consumer Financial Protection Bureau off the ground. Shortly after the president walked me into the Rose Garden to announce my appointment, I started calling the CEOs of financial institutions. My first day on the job, I met with community bankers from Oklahoma. The following day I met with credit union leaders. On Wednesday night, I walked into an audience of several hundred industry leaders at a Financial Services Roundtable event to ask them to help us repair a broken consumer credit market.
The very early feedback I’ve received indicates that the industry is eager for simplification. Some bankers have told me that a short, easy-to-read agreement is exactly what they want. And many others have expressed their interest in working with the new agency to advance a robust market for consumer credit—one that produces real competition that benefits millions of Americans.
Right now, at the birth of this new agency, we have a remarkable opportunity to put aside misconceptions and to work together. Let’s build something better for families, better for the financial industry, and better for the American economy.
Ms. Warren is an assistant to the president and a special advisor to the secretary of the Treasury for the Consumer Financial Protection Bureau.