Consumers may soon have a new financial watchdog

Everyone expected some type of financial reform after the major financial disaster we've all experienced, but no one was sure exactly how this reform would be carried out. Today's Washington Post suggests the Obama administration is looking to create a new regulatory commission focused on protecting consumer's interests. Right now those interests are dealt with piecemeal by a number of entities including the Federal Reserve, the FTC, the SEC and others.

Some of these regulatory agencies place a low priority on consumer protection and the Obama administration wants to change that by creating a body whose primary responsibility is consumer protection for people who use financial products, such as credit cards, mortgages and mutual funds. A leading proponent of such a commission is Harvard University professor Elizabeth Warren, who now chairs the Congressional Oversight Panel for the government's financial rescue initiative.

Warren wrote in a 2007 journal article that, "It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street." She goes on to ask, "Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards left at the mercy of their creditors?"

When Warren first wrote those words she had little support in Washington. After the financial meltdown, the tide turned. Now Senator Richard Durbin has introduced legislation to create a commission like the one she proposed and Senators Charles Schumer and Edward Kennedy co-sponsor it.

In a related story, Bloomberg reports that as part of the regulatory shuffling the Federal Reserve may get more authority while the SEC could lose some functions. Bloomberg, too, believes that some form of a consumer protection agency will be created and that it could take over responsibility from the SEC for the oversight of mutual funds. In the reshuffling, the Federal Reserve may get responsibility for firms deemed too big to fall.

The SEC has not been included in the negotiations according to the Bloomberg report. Apparently, SEC Chairman Mary Schapiro is frustrated about not being consulted and vows to fight any attempt to diminish her agency. Former SEC Chairman Arthur Levitt likely will be on Schapiro's side. Levitt believes the central bank's focus on keeping the financial system solvent may trump efforts to punish companies for violating securities laws. On the face of it, the Federal Reserve would seem to be getting off easy. After all, the Fed missed the ball on protecting consumers from mortgage schemes and abusive practices by credit card companies, and then watched as both fires burned out of control before it finally jumped in to help consumers.

Personally, I think Mary Schapiro should be given time to rebuild the SEC that was run into the ground by Christopher Cox. The SEC has a long history of protecting investors under Levitt and others.

Lita Epstein has written more than 25 books, including the Complete Idiot's Guide to Improving Your Credit Score.

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