How Obama's Consumer Protection Agency Is Rattling Bankers

As President Barack Obama's recently introduced blueprint for financial regulatory reform prepares to wind its way through Congress, industry lobbyists are gearing up to fight one of its key provisions: the establishment of a standalone consumer protection agency. The new agency would be charged with ensuring that consumers have clear information about the financial products or services they purchase and protect them from deception. The agency would accomplish this by requiring lenders to make safer, "plain vanilla" products clearly available to consumers, while stepping up scrutiny on "alternative" products. The new agency would have broad authority to write rules and enforce compliance through fines or penalties.

[See Obama's Financial Regulation Reform: 7 Things You Need to Know.]

Given the role that the misunderstanding and abuse of exotic mortgage products played in sparking the financial crisis, a consumer financial protection agency might not seem terribly radical. But in the short time since its proposal, the idea has whipped trade associations representing financial services and other industries into a fury, as they scramble for ways to stonewall—or at least water down—the provision. "It's the number one issue for the industry, bar none," says one ex-Treasury Department official. 

So what's behind this opposition? Here are four reasons why the prospect of a federal consumer financial protection agency has industry representatives so fired up.

1. Power over products: Under the terms of Obama's plan, the new agency would have sweeping authority over providers of financial products, such as savings accounts or credit cards. And the extent of the new agency's powers is thus far unclear. That's a huge concern for financial services companies who are left to wonder if the federal government will soon be dictating the terms of the products they offer—for example, how high of an interest rate they can charge on a credit card. Should these fears come to pass, the restrictions could hammer banks' bottom lines. To argue their case, trade groups will emphasize how such regulations could stifle innovation in the industry and slow the broader economy.

[Check out Obama's Loan Modification Plan: 7 Things You Need to Know.]

2. Two for one: Should Obama's plan be enacted in its current form, a bank's financial services products would be regulated by one agency—the new consumer protection agency—while the actual institution would be overseen by another. Industry representatives aren't crazy about this bifurcated approach to regulation. Trade groups argue that such a structure would give two different agencies only half of the information they would need for effective regulation, making the whole system weak and inefficient.

3. One more layer: Perhaps the most straightforward reason behind the objections is a simple aversion to more regulators. Many players in the financial services industry believe a new agency would simply add another layer of bureaucracy to an already-onerous regulatory structure.

4. Fees: Funding for the new agency has also stirred concerns. It's possible that the consumer protection agency would be funded through assessments on the firms themselves—similar to the way the Federal Deposit Insurance Corp's insurance fund is paid for. Banks, of course, aren't going to be happy about anything that involves coughing up extra cash.

The Obama administration's financial regulatory reform plan should move smoothly through the House of Representatives, and potentially pass out of the chamber before the August recess. But it faces a much tougher road in the Senate, which is expected to take up the measure in the fall. While the final package is expected to include additional consumer protections, the form in which they will take remains unclear. To be sure, the consumer protection agency that the administration has laid out will face a fierce fight with the industry.