Elizabeth Warren’s principles
Elizabeth Warren isn’t shy about taking sides in the debate between rules-based and principles-based regulation:
In her speech and in an interview earlier in the day, Warren said she hopes to take a more “principles-based approach” to regulation, rather than simply saddling companies with more of what she calls “thou shalt not” rules — which make for burdensome, costly compliance and which banks often start trying to skirt as soon as they are written
“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,” Warren said in her remarks. “But neither restores customer trust.”
Rather, she said, “Let’s measure our success with simple questions” — Can customers understand a product? Do they know the risks? Can they easily figure out what it really costs?
Warren, remember, is a law professor: she knows full well that the main effect of laying down rules is to send a thousand lawyers scurrying to find ways around them. And she’s surely also seen the way in which other regulators — the SEC springs to mind — become overrun by lawyers looking for people breaking rules, rather than regulators trying to ensure a clean and level playing field.
At the same time, principles-based regulation is new to the US, and will be worrying to banks who will never know for sure whether what they’re doing is allowed or not.
It’s true that a malicious and vengeance-minded principles-based regulator would be capable of wreaking havoc on the banking industry, but the same can be said of a malicious and vengeance-minded rules-based regulator, too.
The fact is that it makes perfect sense for a consumer-protection bureau to regulate from the point of view of the consumer, rather than from the point of view of bank managers. Warren’s simple questions are good ones, and they’re hard to capture with rules. If banks provide valuable products to consumers, then consumers will value them. If, on the other hand, banks create products which are designed to prey on human foibles, then consumers will come to believe, in Warren’s words, that “dealing with banks is like handling snakes – do it long enough and you’ll get bit.”
Ultimately, the Consumer Financial Protection Bureau could prove an important case study for other U.S. regulators thinking about moving to a principles-based approach. Such an approach is hardly sufficient to fend of a crisis, as the UK’s Financial Services Agency can attest. But it probably stands a better chance of doing so than thousands of pages of new rules.