U.S. Financial Product Safety Commission Proposal Still on Table

The Obama administration is studying a long-discussed proposal to create a U.S. agency that would protect consumers who buy financial products, possibly as part of a major package of reforms, congressional aides said on Tuesday.

The proposal, offered as legislation weeks ago in Congress, would set up an authority like the U.S. Consumer Product Safety Commission for products ranging from mutual funds to mortgages — an idea that has already elicited questions and debate.

The administration is increasingly interested in consumer-oriented approaches to rewriting the rules for banks and the markets, said a senior House of Representatives aide.

Two other congressional aides said the idea of a so-called Financial Product Safety Commission is on the table at the Treasury Department, center of the administration’s fast-moving and fluid strategizing on financial regulation reform.

U.S. officials met on Tuesday night with academic experts and former officials to gather views on regulatory reform proposals.

“No decisions have been made, but the administration is actively seeking various viewpoints as it puts together its framefwork,” a Treasury official who requested anonymity said.

Faced with the worst financial crisis in decades and a deep recession, the administration is expected to unveil a package of reform proposals soon, possibly this week or in June.

Included will be the formation of a systemic risk regulator, likely at the Federal Reserve, to monitor far-reaching financial risks in the economy, as well as the empowerment of an agency, likely the Federal Deposit Insurance Corp, to seize and unwind large, failing non-bank firms.

To supplement these initiatives and others, Democratic Senators Richard Durbin, Charles Schumer and Ted Kennedy wrote to Treasury Secretary Timothy Geithner in April urging him to include their proposed Financial Product Safety Commission in administration plans for financial reforms.

“There is no reason for us to have regulations that prevent toasters from exploding into flames, but no protections to prevent mortgages and credit cards from doing the same,” the senators wrote.

“Deceptive and dangerous financial products imperil millions of individual families. A Financial Product Safety Commission would set baseline safety standards for financial products like mortgages and credit cards, just as the Consumer Product Safety Commission sets standards for consumer goods.”

The lawmakers introduced legislation in Congress in March along these lines. The senators told Geithner their bill is supported by dozens of public advocacy groups.

Elizabeth Warren, chairman of the Congressional Oversight Panel of the government’s $700-billion financial bailout program, has also argued for a financial products agency.

Both Representative Barney Frank, chairman of the House of Representatives Financial Services Committee, and Senator Christopher Dodd, chairman of the Senate Banking Committee, have expressed a willingness to look at the proposal.

But some lawmakers have raised questions. For instance, while the Consumer Product Safety Commission can warn consumers if a product contains lead paint or cancer-causing chemicals, it is unclear exactly what its financial equivalent would do.

Such an agency could warn consumers of the riskiness of a financial product. But without some sort of investigative and prosecutorial power, its effectiveness might be limited.

Creating an agency with such powers would mean stripping existing agencies, such as the U.S. Securities and Exchange Commission and state agencies, of authorities they now have.

SEC Chairman Mary Schapiro has already spoken out against approaches that would strip her agency of its ability to protect investors and regulate markets.

The financial services industry would be solidly opposed to a powerful new agency like the Federal Trade Commission, said one lobbyist who asked not to be identified.

(Reporting by Kevin Drawbaugh, Patrick Rucker, Jeremy Pelofsky and Rachelle Younglai; Editing by Kim Coghill)