The CHOICE Act is just Dodd-Frank 2.0. We can do better.
© Getty Images

As the Republicans consider financial reform, they appear to be making the same mistake the Democrats did with the original Dodd-Frank legislation in 2010. Rather than work with the Republicans to craft well-designed reforms, the Democrats hastily crammed through legislation that contained several serious flaws along with some much-needed fixes. 

It looks like the Republicans are about to do the same. They are hastily crafting a partisan bill with lots of patches for our financial system without dealing with the fundamentally dysfunctional structure of the hundreds of financial regulatory agencies at the state and federal levels.

ADVERTISEMENT

To be sure, there are a lot of problems with the 895-page Dodd-Frank Act. It contained many provisions that were political deals to get congressional votes that had nothing to do with the financial crisis. For example, the conflict minerals provision requires public companies (but not private ones) to reveal their use of various minerals from the Democratic Republic of the Congo.

 

The Durbin amendment imposed price controls on the fees that banks could charge merchants on debit cards (but not credit cards). The bill was drafted so haphazardly that even the name of the new Consumer Financial Protection Bureau was not even written consistently. 

But there were more serious flaws. One of the scary parts of the original law was the provision that gave the secretary of the Treasury, in consultation with the president, broad powers to seize a financial institution that she or he determined was in danger of default. Imagine the leverage that this would give a Lyndon B. Johnson, let alone a Donald J. Trump, to coerce a large financial institution to fund his endeavors. “Do what I want, Goldman, or I will find you in danger of default and take you over.” 

To be sure, much of Dodd-Frank needed to be done. Establishing a regulatory scheme for previously unregulated over-the-counter (OTC) derivatives was long overdue.  However, Dodd-Frank did not address the incoherent structure of our financial regulatory system. Instead, Dodd-Frank just prescribed regulatory nightmares like the Volcker Rule that required joint rulemakings from five different agencies to implement. 

The proposed 589-page Financial CHOICE Act does very many things, some good and some not so good. It gets rid of many of the well-meaning but misguided parts of Dodd-Frank, such as conflict minerals and the Volcker Rule.

Conversely, it repeals the “orderly liquidation authority” — the blank check for seizing financial institutions — without providing a coherent substitute for what to do when large institutions fail. After all, there is no such thing as “too big to fail” because large institutions do fail. We need appropriate plans to contain the damage when, not if, they fail. Getting rid of the “living will” requirements is a step backward.

The Financial CHOICE Act renames the Consumer Financial Protection Bureau (CFPB) the Consumer Law Enforcement Agency and scales back its budget along with its powers. The CFPB formerly had a blank check to spend whatever it wanted out of the Federal Reserve System’s largesse, and it was run by a single all-powerful chief.

The Financial CHOICE Act brings the CFPB, along with several other regulators, into the regular appropriations process and puts their employees on the regular General Schedule (GS) pay scale. Another provision requires the salaries of Federal Reserve employees above a certain level to be made public. 

With regulation, we get what we pay for. We have a long history of being "penny wise and pound foolish" in funding regulation: The Securities and Exchange Commission's (SEC) total budget from its founding in 1934 to the present is less than investors lost in Enron alone. Financial experts are not cheap. If the government is not willing to pay enough to hire good experts, then we will get shoddy rulemaking that will impose excessive costs on consumers and businesses, along with shoddy enforcement that will pave the way for the next Bernie Madoff. 

The Financial Choice Act repeals the Department of Labor’s (DOL) complicated Fiduciary Rule that requires purveyors of financial advice to retirement accounts to put the beneficiaries’ interests first. This rule is a classic example of what is wrong with our financial regulatory system:

The DOL has some jurisdiction over retirement accounts. The SEC has some authority over stock brokers and financial advisers. The CFPB and the Federal Reserve have some authority over banks. No federal agency regulates insurance salespeople. This jumble of overlapping financial regulators has created a confusing mess with regard to the standards of consumer protection. 

The DOL has little expertise in financial regulation and even less ability to enforce its new rule. Rather than fix the regulatory jumble, the Financial CHOICE Act just repeals the DOL rule until the SEC exercises its authority to implement a similar rule. But the SEC has no authority over insurance or bank products, so no matter what the SEC and the DOL do, there will still be serious gaps in consumer protection.  

The Financial CHOICE Act is really just Dodd-Frank 2.0, a patchwork of partisan fixes to our very creaky financial structure. Congress needs to address the dysfunctional tangle of overlapping regulatory agencies that is at the root of the problem. Overlapping agencies such as the Commodity Futures Trading Commission (CFTC) and the SEC should be merged into a Financial Services Commission. 

The CFPB should then be included, rather than left as an underfunded standalone bureaucracy. The Financial Services Commission should also have the ability to provide optional federal charters to insurance companies that wish to compete across state lines, an important move in improving the efficient provision of health insurance. If we have a good regulatory structure, it will make the right decisions to protect consumers and promote economic stability and growth. 

 

James J. Angel, Ph.D., CFA, is an associate finance professor at Georgetown University’s McDonough School of Business.


The views expressed by contributors are their own and not the views of The Hill.