The Obama administration has been moving fast on a lot of fronts, but certainly one of the longstanding legacies will be regulatory reform in the financial services sector. We’ve blogged here before about Hal Scott and the Committee on Capital Markets Regulation (CCMR), and some of those ideas have made their way into the current proposals currently being floated by the Obama administration.The CCMR borrowed from the FSA’s model, and while current proposals don’t go that far (and Barney Frank won’t let them), there will likely be some regulatory consolidation in future legislation.
At Compliance Week this morning, SEC Commissioner Luis Aguilar spoke about several different proposals being floated by the Obama Administration. In his keynote, he commented on the systemic risk regulator, the financial product consumer protection agency and the single, consolidated financial services instustry regulator.
On the systemic risk regulator, Aguilar pointed out that the system needs to be protected from a failure in function, not (necessarily) from a failure of institutions. Currently, there are two models being discussed, a monolithic regulator (the Fed) and a more diverse council of regulators. Aguilar argues for the latter as better able to identify and mitigate risk through the variety of perspectives from a council-type format. Further, he argued that there could be inherent conflicts between the systemic risk regulator charter and the stewardship of monetary policy.
Elizabeth Warren’s argued that you can’t buy a toaster that has a 1 in 5 chance of bursting into flames and burning down your house. Aguilar supported Warren ’s notion that consumers of financial product must be protected but believes that there should not be a single regulatory authority over, say, credit card and mutual funds. The purposes, pricing, and value chains for the products are totally different. He further noted that there’s already a viable entity for investor protection, although in the Q&A he pointed out that the SEC is not self-funded and regulates 35,000 entities with a staff of 3,600 (vs. the FDIC, for instance, that regulates 5,100 banks with a staff of 5,000).
Finally, regarding the proposal for a single, consolidated financial services industry regulatory, Aguilar said that he “would be very concerned that a single regulator could result in a loss of investor protection.” For instance, he saw a conflict in full-disclosure if the same entity were charged with regulating institutions and financial products for investment purposes. He was supportive of an integrated capital markets regulator that might be a combination of the SEC, CFTC and parts of the Department of Labor (Employee Benefits Security Administration).
What was most remarkable about Aguilar’s comments was not the proposals themselves as much as the lack of clarity around how this will play out. Stay tuned.