by Deepak Gupta
Last week, Elizabeth Warren went into the lion's den, giving a dinner speech in Washington to the Financial Services Roundtable -- the banking industry's lobbying group. According to one account, she gave a "tough speech to bankers, comparing them to 'snakes' and their lending practices to 'garbage.'"
Or at least that's how the speech was characterized by certain news outlets. But if you go beyond the headlines and actually read the text of the speech, what you'll find is that Warren outlined a pragmatic, principles-based approach to regulation that contrasts sharply with a heavy-handed regime focused on technical disclosure requirements. Drawing inspiration from the SEC's first chairman, banker Joe Kennedy (pictured), Warren explained how smart regulation can create opportunities for good business to thrive. The heart of her speech focused on a proposal put forward by the Financial Services Roundtable itself:
Regulation can take two obvious forms: Regulators can make more pronouncements from on high, identifying suspicious practices in the various markets and banning them. Or regulators can layer on more disclosure requirements. But neither restores customer trust. In one case, it becomes the job of the agency to highlight industry shortcomings and pile on more and more “thou shalt not” rules, and, in the other case, consumers are hit with even more paperwork— and a growing suspicion that the game is rigged against them. . . .
But I’m here tonight to talk about an alternative recommended by the Financial Services Roundtable three and a half years ago: a principles‐based approach.
Instead of creating a regulatory thicket of “thou shalt nots,” 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.
Instead of layering on regulations that don’t fully protect consumers, a better approach would focus on how to give consumers the power to make the right choices for their families—and, at the same time, to ease the regulatory burden for the lenders. Best of all, if we do this right, perhaps together we can reassure families that the people in this room have met their own goal of fair treatment and that they should be treated as trusted friends.
More on Warren's vision for the new agency, below the jump.
Warren went on to use credit-card simplification, a longtime priority of hers, as an example of how a principles-based approach can work. She closed by describing her vision for the new Consumer Financial Protection Bureau:
It has been a long time since Congress established an agency from scratch. To build the consumer agency, we will be drawing on the proven experience and competence of the staff at many federal agencies. But if all we do is bring together those staffs to continue writing “thou shalt not” regulations and layering on more disclosures, then we will have missed a real opportunity. And if all those resources are used just to force an entire industry, begrudgingly or worse, to accept marginal changes in a few forms, we will have missed a real opportunity. On the other hand, if we use this moment to rethink our approach to regulating financial services, then we can seize the opportunity to do something unexpected—and exceptional.
It is now, right here at the beginning, that we have a remarkable chance to put aside misconceptions and preconceptions‐‐whether they are yours or mine. We have a chance to build something better, to pour over the research and data together, and to identify problems and solutions, with or without regulation.
The new agency’s voice will be independent and strong. I hope its goal will be to advance a robust market for consumer credit, one that produces real competition that benefits millions of American families by making it easy for them to know the terms of the deal with their lenders and to shop around for the best products. In the long run, this will be good for families. And, like Joe Kennedy said, it will be good for the lenders who want to build thriving businesses serving their customers. And it will be good for America, for my children and grandchildren and yours, creating more economic stability throughout the system, from families to Wall Street—and back again.
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