Academic journal article Texas International Law Journal

Financial Consumer Protection in the Post Financial Crisis Era: Can the American CFPB Serve as a Model for Other Jurisdictions?

Academic journal article Texas International Law Journal

Financial Consumer Protection in the Post Financial Crisis Era: Can the American CFPB Serve as a Model for Other Jurisdictions?

Article excerpt

TABLE OF CONTENTS

INTRODUCTION.................... 172

I. Prudential Regulation and Conduct of Business Regulation - Separation or Consolidation....................174

A. Models of Financial Regulation....................174

B. Consumer Protection and Prudential Regulation - Considerations for Separating the Powers....................176

C. Consumer Protection and Prudential Regulation - Considerations for Consolidating the Powers....................177

D. The American Choice: Separating Consumer Protection....................179

II. THE CFPB MODEL....................181

A. Independence and Autonomy vis-a-vis the Prudential Regulators....................181

B. The CFPB's Rule-Making Power....................182

1. Consultation Duty....................182

2. Regulatory Set Aside....................183

C. The CFPB 's Monitoring and Supervision Power....................184

D. The CFPB 's Enforcement Power....................185

E. The Fragility of the CFPB Model....................186

III. APPLYING THE CFPB MODEL TO OTHER COUNTRIES....................189

A. The Israeli Financial Sector and its Supervision....................190

1. The Banking Supervision Department....................190

2. The Capital Market, Insurance and Savings Authority....................191

3. Israel Securities Authority....................192

B. Israel - Consolidating Consumer Protection and Prudential Regulation.... 193

C. The Ramifications of Financial Regulatory Reform.................... 195

D. Israel-The Financial Stability Committee.................... 196

CONCLUSION....................198

INTRODUCTION

Financial regulation deals with two main areas: prudential regulation, whose goal is to maintain the safety and soundness of the financial system, and consumer protection.

One important insight learnt from the global financial crisis is the close relationship between these two areas. As is well known, the financial crisis began with a failure of consumer protection - predatory lending by American mortgage banks to borrowers who clearly lacked repayment ability, which eventually evolved into a global stability crisis. The global financial crisis led to a worldwide acknowledgement that, in order to prevent a financial crisis, it is not enough to maintain the stability of the financial system, but there is also a crucial need to supervise the banks' conduct towards their customers. One of the measures taken by the US government in this regard was the establishment of a designated regulator for financial consumer protection, namely the Consumer Financial Protection Bureau ("CFPB" or "the Bureau").

There are several variations of a regulatory structure that maintain separation between prudential regulation and consumer protection. The most iconic is the "Twin Peaks Model," which exists in the UK and a few other countries.1 Under the Twin Peaks Model, the supervision over the entire financial sector is divided between two separate regulators: One regulator is responsible for prudential regulation, while the other is in charge of financial consumer protection. However, the majority of countries chose not to make such a separation, and placed both powers in the hands of the same regulator.2

The purpose of this essay is to examine whether, and to what extent, the American CFPB can serve as a model for other jurisdictions.

The test case for this analysis will be the financial sector in Israel. Both in Israel as well as in the US, the structure of the financial regulation is mainly sectoral, with each financial sector subject to a separate regulator. In addition, in both countries, in the aftermath of the global financial crisis, there appeared to be a clear need-and public demand-to strengthen the financial consumer protection. However, there are important differences between the two countries: Whereas the US economy collapsed in the wake of the financial crisis, Israel survived the crisis well and no bank collapsed or encountered difficulties. …

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