To Watchdog or Not to Watchdog? the CFPA and Fraud

March 2010

IN THIS ISSUE

— Responding to the Crisis: The Case for CFPA
— O Canada? Effectiveness of the Financial Consumer Agency of Canada
— In the next issue

GREETINGS!

Welcome to the March 2010 edition of our newsletter! In this issue, we’ll examine the stated reasons for creating the Consumer Fraud Protection Agency, and look at whether the system on which it’s modeled has proven effective enough to merit importation to the United States.

RESPONDING TO THE CRISIS: THE CASE FOR CFPA

The events are all too familiar for professionals and laymen alike: in the fall of 2008, the U.S. financial markets teetered on collapse, owing in large part to the default on sub-prime mortgages and subsequent failure of many investment linked to those mortgages. As regulators and educators surveyed the damage, it became clear that one root cause – though by no means the only cause – was that many individuals were “hustled” into approving mortgages at terms they didn’t understand, or terms which were misrepresented to them.

In the 18 months since that collapse, mortgage fraud has indeed risen, with U.S. Treasury unit FinCEN reporting that suspicious activity reports of “possible mortgage loan fraud” have risen by 7.5 percent. It didn’t take a prolonged crisis to convince Obama administration advisers that further protections were needed, however — adviser Elizabeth warren, whom Obama proposed would lead the new group, had first called for such an agency more than a year before the crisis, in June 2007.

O CANADA? EFFECTIVENESS OF THE FINANCIAL CONSUMER AGENCY OF CANADA

Warren’s inspiration for the CFRA? Canada’s Financial Consumer Agency (FCAC), which has been in operations since 2001. One of its major stated goals is similar to recently enacted credit-card legislation, increasing consumer awareness and access to information, which in turn “helps consumers enjoy the social and economic benefits of participating in a fair and secure Canadian financial marketplace.”

How has the CFRA furthered its goal? Via many initiatives that seem to replicate existing efforts undertaken in the U.S. by the Federal Trade Commission, U.S. Securities and Exchange Commission or Federal Deposit Insurance Corporation, with respect to disclosures by banks and trust companies, or their publicly-traded holding companies.

In 2008-2009, the FCAC received a total of nearly 5,000 complaints regarding mortgages, credit cards, insurance and other financial instruments. Of these, nearly one-fifth were referred to other agencies, but the FCAC report does not state how it handled the other 4,000 complaints. So is the Canadian way the way forward to fight consumer financial fraud and abuse? Their numbers don’t really tell the story.

IN THE NEXT ISSUE

In the April issue, with the SEC’s increased call for whistleblowers related to Ponzi schemes, we’ll look at the pro and cons of tip lines.