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Warren Confronts Financial Services Roundtable with Their Own Idea for Consumer Protection

Elizabeth Warren

Newly minted Assistant to the President and Special Advisor to Treasury Elizabeth Warren chose as the site of her first major speech the Leadership Dinner of the Financial Services Roundtable, a trade lobby representing banks like JPMorgan Chase and Bank of America. Warren, known for her combative stance against the predatory practices of the big banks and lenders, opted for a conciliatory speech in the proverbial belly of the beast, seeking common ground on the consumer protections she will help shape for the new bureau created as part of the Dodd-Frank law.

Warren is tasked with standing up the Consumer Financial Protection Bureau, and at the Financial Services Roundtable, she sought to find a durable solution to the consumer credit markets, which all sides could accept. “I’m not going to change. I will be a strong and independent advocate for hard-working, play-by-the-rules, middle class families,” Warren said. “But the best way, in my view, to strengthen those middle class families is to find solutions that are deep and lasting, that strengthen the markets, and that will create a robust, competitive consumer credit industry that works for families, not against them.”

The essence of Warren’s speech made the argument that good regulations and thriving businesses go hand in hand, where the market will decide winners and losers through competition on price and quality rather than deception. Acknowledging her at times open criticism against the leaders of the institutions in the room, Warren maintained, “I come to Washington as a genuine believer in markets and a genuine believer that the purpose of regulating the consumer credit market is to make that market work for buyers and sellers alike: a level playing field where the best products at the best prices win.” Lamenting the fine print and devious tricks hidden in credit agreements, she added that consumers don’t want a free ride but an honest marketplace.  [cont’d.]

She offered a vision of an agency that would not only write new rules for the entire industry, but consolidate and even eliminate existing ones. But instead of an approach based on individual rules (though she vowed to prohibit unfair practices and increase disclosure to the consumer), Warren highlighted an approach based on principles, a vision for how financial services regulation should work. This principles-based approach is actually something the Financial Services Roundtable proposed back in 2007, though I doubt they envision it the same way as Warren.

Here’s how she described it. “Instead of creating a regulatory thicket of ‘thou shalt nots,'” she said, “and instead of using ever more complex disclosures that drive up costs for lenders and provide little help for consumers, let’s measure our success with simple questions. Your first principle is ‘Fair treatment for consumers.’ I’ll paraphrase your explanation of how to tell if that principle has been met: Can customers understand the product, figure out the costs and risks, and compare products in the marketplace? Regulators should be aiming toward the goals you laid out.”

Warren used the example of a credit card agreement. Customers, she said, “should be able to understand the deal, assess the costs and risks, and compare one card to another.” She valued short agreements with basic, easy-to-understand information contained therein, like the interest rate, the penalty terms and any reward offers, that could be read and comprehended in about four minutes.

I don’t see this as a retreat from stringent rules on lenders so much as a new conception of how to apply them. With simple contracts as a goal, regulators can better provide oversight then double-checking to see if every rule gets followed. They can approve or deny the consumer agreements, and if they do their jobs right, foster a competitive marketplace. And this goes down the line, from credit cards to mortgages to all other financial services contracts. What’s more, this approach could benefit smaller banks by leveling the playing field:

Earlier on Wednesday, she told reporters that the traditional rulemaking approach would put smaller banks at a disadvantage because it would raise compliance costs and “locks in an adversarial relationship” between banks and their customers, letting the rules shape the products.

She said she wants credit cards and mortgages to be more like toasters or cell phones, where customers can easily compare the costs and benefits.

Now, as leading British financial regulator Hector Sants said in a moment of candor, “a principles-based approach does not work with individuals who have no principles.” And that could be true here as well. But if anyone can make it work, it would be a watchdog with the stature of an Elizabeth Warren. Plus, the rules-based approach and the principles-based approach both rely on regulators to lay down the proper enforcement, which is the real key to all of this.

Warren closed by saying that the consumer protection bureau represented an opportunity to “rethink our approach to regulating financial services… to do something unexpected—and exceptional.” It certainly would be.

CommunityThe Bullpen

Warren Confronts Financial Services Roundtable with Their Own Idea for Consumer Protection

Newly minted Assistant to the President and Special Advisor to Treasury Elizabeth Warren chose as the site of her first major speech the Leadership Dinner of the Financial Services Roundtable, a trade lobby representing banks like JPMorgan Chase and Bank of America. Warren, known for her combative stance against the predatory practices of the big banks and lenders, opted for a conciliatory speech in the proverbial belly of the beast, seeking common ground on the consumer protections she will help shape for the new bureau created as part of the Dodd-Frank law.

Warren is tasked with standing up the Consumer Financial Protection Bureau, and at the Financial Services Roundtable, she sought to find a durable solution to the consumer credit markets, which all sides could accept. “I’m not going to change. I will be a strong and independent advocate for hard-working, play-by-the-rules, middle class families,” Warren said. “But the best way, in my view, to strengthen those middle class families is to find solutions that are deep and lasting, that strengthen the markets, and that will create a robust, competitive consumer credit industry that works for families, not against them.”

The essence of Warren’s speech made the argument that good regulations and thriving businesses go hand in hand, where the market will decide winners and losers through competition on price and quality rather than deception. Acknowledging her at times open criticism against the leaders of the institutions in the room, Warren maintained, “I come to Washington as a genuine believer in markets and a genuine believer that the purpose of regulating the consumer credit market is to make that market work for buyers and sellers alike: a level playing field where the best products at the best prices win.” Lamenting the fine print and devious tricks hidden in credit agreements, she added that consumers don’t want a free ride but an honest marketplace.

She offered a vision of an agency that would not only write new rules for the entire industry, but consolidate and even eliminate existing ones. But instead of an approach based on individual rules (though she vowed to prohibit unfair practices and increase disclosure to the consumer), Warren highlighted an approach based on principles, a vision for how financial services regulation should work. This principles-based approach is actually something the Financial Services Roundtable proposed back in 2007, though I doubt they envision it the same way as Warren.

Here’s how she described it. “Instead of creating a regulatory thicket of ‘thou shalt nots,'” she said, “and instead of using ever more complex disclosures that drive up costs for lenders and provide little help for consumers, let’s measure our success with simple questions. Your first principle is ‘Fair treatment for consumers.’ I’ll paraphrase your explanation of how to tell if that principle has been met: Can customers understand the product, figure out the costs and risks, and compare products in the marketplace? Regulators should be aiming toward the goals you laid out.”

Warren used the example of a credit card agreement. Customers, she said, “should be able to understand the deal, assess the costs and risks, and compare one card to another.” She valued short agreements with basic, easy-to-understand information contained therein, like the interest rate, the penalty terms and any reward offers, that could be read and comprehended in about four minutes.

I don’t see this as a retreat from stringent rules on lenders so much as a new conception of how to apply them. With simple contracts as a goal, regulators can better provide oversight then double-checking to see if every rule gets followed. They can approve or deny the consumer agreements, and if they do their jobs right, foster a competitive marketplace. And this goes down the line, from credit cards to mortgages to all other financial services contracts. What’s more, this approach could benefit smaller banks by leveling the playing field:

Earlier on Wednesday, she told reporters that the traditional rulemaking approach would put smaller banks at a disadvantage because it would raise compliance costs and “locks in an adversarial relationship” between banks and their customers, letting the rules shape the products.

She said she wants credit cards and mortgages to be more like toasters or cell phones, where customers can easily compare the costs and benefits.

Now, as leading British financial regulator Hector Sants said in a moment of candor, “a principles-based approach does not work with individuals who have no principles.” And that could be true here as well. But if anyone can make it work, it would be a watchdog with the stature of an Elizabeth Warren. Plus, the rules-based approach and the principles-based approach both rely on regulators to lay down the proper enforcement, which is the real key to all of this.

Warren closed by saying that the consumer protection bureau represented an opportunity to “rethink our approach to regulating financial services… to do something unexpected—and exceptional.” It certainly would be.

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David Dayen

David Dayen