Investment and Insurance Regulatory Murkiness Sure Bet if Plan Advances
ROCKLIN, Calif. -- The backlash following the release of the controversial regulatory agency overhaul proposal from the Treasury Department last week came on several fronts within the credit union industry.
Trade groups blasted the 218-page "Blueprint for a Modernized Financial Regulatory Structure," which among other short- and long-term goals, would establish a new federally insured depository institution charter that would consolidate national banks, federal savings associations and federal credit union charters. Critics have said that move alone could conceivably eradicate the credit union nonprofit model.
Just as troublesome and murky, critics contend, is the impact a consolidation of regulatory agencies would have on credit union investment and insurance programs as well as their relationships with CUSOs.
"The reality is that this proposal takes a square peg and puts it in a round hole," said Pete Snyder, president/CEO of Snyder Consulting Solutions, an investment and insurance service integration firm. "The rippling effect and the complexity [of implementation] would have to be addressed if consolidation is going to occur."
Under the Blueprint proposal, the Securities and Exchange Commission's oversight of investment banks would significantly dwindle as would the agency's regulation of registered investment advisers, some fear.
The Federal Reserve could also have more authority to monitor nonbank institutions like Wall Street investment banks.
For its part, the SEC said market shakeups and the lingering subprime crisis have provided more evidence that better integration of financial service regulatory agencies may be long overdue.
"Recent events have provided further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility," said SEC Chairman Christopher Cox in a March 29 statement.
Cox said that proposed consolidation of responsibility for investor protection and the regulation of financial products "deserve[s] serious consideration as a way to better address the realities of today's markets."
"Just as systemic risk cannot be neatly parceled along outdated regulatory lines, the overarching objective of investor protection can't be fully achieved if it fails to encompass derivatives, insurance and new instruments that straddle today's regulatory divides," Cox said.
Meanwhile, Snyder pointed to the overlaps and gaps sure to come should the proposal become a reality, starting with NCUA's Letter 150, which recognizes that CUSOs may participate with a credit union and a broker under certain conditions without the financial institution having to register. That guidance came in 1993. The FDIC did not issue any directions on these types of arrangements but chose to leave it up to the Office of the Comptroller of the Currency, Snyder said. An interagency statement that touched on the matter but issued prior to 1993 was "materially different" from Letter 150, he added.
The point? Count on regulatory murkiness to be one of the outcomes of the Treasury's Blueprint.
"If the proposal on consolidation is chapter one, then there would need to be at chapter two, three and four," Snyder said.
NACUSO is concerned that the regulatory agency overhaul proposal would not only do away with the credit union model but eliminate the movement's "greatest hedge against unchecked greed."
Guy Messick, general counsel for NACUSO, pointed out that the Treasury proposal summary states that its goal is to eliminate all distinctions in structure and regulations among banks, thrifts and credit unions to "create a level playing field among all types of depository institutions where competition can take place on an economic basis rather than on the basis of regulatory differences."
"Unless banks are eager to become nonprofit entities, we can all guess that it will be the nonprofit cooperative credit unions that will cease to exist," Messick said. "The nonprofit cooperative structure permits a financial institution to serve members without the constant quarterly earnings pressure that inhibits banks from innovation and giving back value to the members."
Bank executives "cannot take the long view," Messick said, because if they do not meet the short-term profit goals, "they will be fired."
"This is the very pressure that compelled some banks to make major investments in the subprime market and entices them to take other imprudent risks," Messick said. "It is the credit union nonprofit model and the conservative people running credit unions that is the greatest hedge against unchecked greed and Treasury wants to take that distinction away."
Just as investment regulation could face an upheaval, insurance programs at credit unions are just as vulnerable, Snyder said. Regulation is simpler for credit unions, he said, because banks, with their different models, have a multitude of rules to follow. Consolidation would significantly complicate oversight for insurance programs at credit unions.
While Treasury Department Secretary Henry Paulson disputes charges that the proposal is a knee-jerk response--the report has been in the works since March 2007, he pointed out--to the present credit and housing crunch, he acknowledged that much more breathing room is needed before the Blueprint moves forward.
"Our first and most urgent priority is working through this capital market turmoil and housing downturn, and that will be our priority until this situation is resolved," Paulson said. "This Blueprint addresses complex, long-term issues that should not be decided in the midst of stressful situations and should not be implemented to add greater burden to a market already under strain. These long-term ideas require thoughtful discussion and will not be resolved this month or even this year."