June 24 (Bloomberg) -- After an era of consumer financial abuses, how would you oversee the most damaging industries?
The Obama administration’s proposed consumer financial watchdog overhaulavoids confronting the most frequent offenders while under-regulating a key industry.
Many of the products sold by banks, brokers and insurance agents have fallen through the cracks of the current regulatory regime. The administration’s proposed creation of the Consumer Financial Protection Agency may not do any better in policing these troubling investments.
What does Obama’s 88-page plan, for example, suggest to curb the sale of highly illiquid auction-rate securities, which were sold as if they were safe money-market funds? State securities agencies largely took the lead on returning more than $60 billion to investors, not the U.S. Securities and Exchange Commission or banking regulators.
Consumer truth-in-labeling laws should apply to financial products, yet there was no mention of this kind of disclosure in the overhaul proposal.
If consumers can see warning stickers for step ladders, baby strollers and laptop-computer batteries, the government can mandate plain-English disclosure for financial products. Sample Warning: “This product may lose as much as 60 percent of its value!” At present, snack food has better labeling.
Specific Abuses
It’s a shame the administration’s white paper didn’t specifically name some of the most egregious investor issues it should be trying to police. My short list would include:
-- Why were parents in certain college savings plans hit with huge losses by bond-fund managers speculating in high-risk mortgage derivatives last year? Right now, so-called 529 plans are overpriced and loosely regulated by states -- who often get a cut of administrative fees -- and the Municipal Securities Rulemaking Board, which polices municipal bonds. State authorities aren’t up to the task.
-- Who is watching over 401(k)-type retirement plans in Obama’s proposed agency? Last year, investors lost as much as 41 percent in misleadingly labeled target-date maturity funds, vehicles that investors thought would lock in principal by a certain date. The SEC, Congress and the U.S. Labor Department have been unable to provide clear risk disclosure and rein in excessive fees.
Insurance Products
-- What about insurance-product abuses? Federal and state regulators have been inadequately supervising the aggressive marketing of variable annuities for years. Several times a year I get a call or see a story about some 80-year-old who had been sold these high-commission products. One strong agency should take the lead on this perennial problem.
Also in doubt is the essential need to uniformly supervise all financial consultants and planners.
Right now, regulation is a mishmash. Investment advisers register with the SEC. Brokers are somewhat supervised by the states and industry-ledFinancial Industry Regulatory Authority. Anyone can claim to be a financial planner these days.
The overhaul proposal dances around the issue of making broker-advisers more accountable, citing a need to establish a tougher “fiduciary duty” for broker-dealers.
That means brokers could be sued and wouldn’t be subject to loose “suitability standards” that force aggrieved investors into industry-dominated mandatory arbitration. It’s the fiduciary standard that should be required for everyone who gives financial advice, although the administration’s framework doesn’t say that.
AIG Catastrophe
What about insurance companies that are allowed to sell investments, policies, manage money and run potentially catastrophic portfolios in derivatives? Remember American International Group Inc.?
It’s regrettable the administration proposes an “Office of National Insurance” within the Treasury Department for just “monitoring” this 135-year-old, almost $6 trillion industry.
The administration can do better than that. If it wants supervision with some teeth, it will need a strong national regulator that won’t simply duplicate spotty state authorities.
It’s a step in the right direction, though, that a new consumer agency will supervise mortgages, savings and other banking products.
Yet Wall Street and the banking industry hate the idea of strengthening this porous system to make it more pro-investor and have already begun to fight the administration’s reform attempts. That means you still have to be your own cop in vetting brokers, advisers and insurance agents.
The proposal that the administration is floating will be reworked before it’s crafted into legislation that the president has urged Congress to pass before the end of the year.
But as it reads now, the consumer watchdog they are proposing won’t hunt, bark or bite. It can barely walk.
(John F. Wasik, author of “The Cul-de-Sac Syndrome,” is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: John F. Wasik in Chicago atjwasik@bloomberg.net
