Representatives of the financial industry and policy analysts are concerned about reports that the U.S. Consumer Financial Protection Bureau is considering taking a formal role in helping Americans better understand and manage their retirement savings. Such a move would mark the agency’s first entry into consumer retirement investments.
The agency has justified its interest by noting that a tsunami of retirement account rollovers are expected in the coming decade as millions of baby boomers reach retirement age, making seniors potentially vulnerable to financial scams.
Critics of the independent agency note that it lacks congressional oversight, and since it is funded by the Federal Reserve rather than regular appropriations, its “educational” role easily could expand to one of regulating individual retirement nest eggs or employer-provided retirement plans, and elected officials could do little to stop it.
As a response to the housing market collapse, Congress created the CFPB in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act to oversee consumer financial products and protect consumers. Title X of the act consolidated authority over rules arising from consumer protection laws that had been divided among seven agencies.
Already heavily regulated
Steven Long, a partner in the Raleigh law office of Parker Poe Adams & Bernstein who advises businesses and individuals in tax and employee benefits issues, said he doesn’t see a need for more policies and rules from another regulatory agency since pensions and retirement accounts now are regulated heavily by the federal government. The 1974 Employee Retirement Income Security Act is enforced jointly by the Department of the Treasury, the Department of Labor, and the Pension Benefit Guaranty Corporation.
“ERISA imposes high fiduciary standards and obligations on private-sector employee benefit plans and that includes education of participants and beneficiaries,” Long said.
A bureau spokesman declined to comment to Carolina Journal on media reports about potential interest in individual accounts. The spokesman said the Dodd-Frank act directed the bureau through its Office for Older Americans to identify best practices and effective ways to educate seniors about personal financial management, including long-term savings.
Because 401(k)s and IRAs are two ways that Americans save for their retirement, the bureau said it wants to ensure seniors have the information to make informed decisions at crucial times, such as when rolling over their investments, taking out loans, or modifying their investments.
Total U.S. retirement assets as of Sept. 20, 2012, were $19.4 trillion, with $5.3 trillion in individual retirement accounts and $3.5 trillion in 401(k) plans, according to the Investment Company Institute, an investment industry association.
When the bureau became operational July 21, 2011, it was limited by statute to enforcing existing rules for banks and credit unions with more than $10 billion in assets until the Senate confirmed a director. Once the Senate confirmed a director, however, CFPB gained authority to supervise larger participants in nonbank services.
But it’s unclear if Richard Cordray, CFPB’s director, is on the job legally. Diane Katz, a research fellow in regulatory policy for The Heritage Foundation, noted that a Jan. 25 decision by the U.S. Court of Appeals for the D.C. Circuit ruled that President Obama’s use of recess appointments to install three members of the National Labor Relations Board was invalid because the Senate was not in recess at the time. Since Obama used the same procedure on the same day to appoint Cordray, the validity of that appointment is in doubt, opening the door to a legal challenge by financial services companies affected by CFPB actions, Katz told CJ.
Retirement products are regulated by the Securities and Exchange Commission, the U.S. Department of Labor, and several other agencies, Katz said.
The CFPB’s rulemaking and enforcement actions in mortgage lending, education lending, and consumer banking already are limiting consumer choices and raising the cost of financial products and services, Katz said, so she’s concerned the same thing could happen with retirement products and services.
In its haste to set up another regulatory agency to solve a yet another crisis, critics say the CFPB was established in a manner that frees it of normal democratic checks and balances that apply to virtually every other regulatory agency.
By creating the bureau within the Federal Reserve System and granting it permanent funding from the after-dividend profits of the Federal Reserve, Congress has no control over the bureau’s budget.
In a January article for The Heritage Foundation, Katz wrote this budget independence limits congressional oversight and even precludes presidential oversight and Federal Reserve intervention in bureau affairs.
Alex Pollock, research fellow at the American Enterprise Institute, wrote in a January 2012 American Banker article that “funding the CFPB by tapping the Fed’s profits was an obvious, but successful transfer of money from the taxpayers without normal congressional appropriations, and moreover removed the ability of future Congresses to control the new expansive bureaucracy by the purse.”
Pollock said the bureau, as with all other government entities, “should be subject to checks and balances — just as [the federal government was] designed by the American Founding Fathers.”
Katz and legal experts have raised concern over vague language in the statute, especially regarding the bureau’s enforcement authority against “unfair, deceptive, and abusive practices” in financial products and services.
While legal standards exist for “unfair” and “deceptive,” existing regulatory law does not include the concept of “abusive,” Katz said, raising the specter of arbitrary enforcement when the bureau defines “abusive.”
Katz also noted in the Heritage article that the statute does not define “risk,” leaving the bureau free to “define its powers without the checks and balances that typically protect citizens from government overreach.”
On its website, the bureau solicits and posts complaints from consumers naming specific companies without verifying any allegations of wrongdoing. The bureau “is crafting regulations and commencing supervision and enforcement actions based, in part, on consumer allegations that are never checked for accuracy,” Katz said.
While some CFPB opponents would like to see the statute establishing the bureau repealed, they do not advocate returning to the old regulatory model which allowed different agencies to apply different standards. Many critics agree that the CFPB’s budget should be subject to congressional control and oversight.
CJ contacted North Carolina’s U.S. senators, Republican Richard Burr and Democrat Kay Hagan, both of whom serve on the Senate Committee on Health, Education, Labor and Pensions. Burr’s spokesman said the senator was unaware of any possible CFPB involvement in consumer retirement investments since the issue had not come up in committee. Hagan’s spokesman did not comment.
Karen McMahan is a contributor to Carolina Journal.