May 22, 2013

If The IRS Bothers You, So Should The FSOC and CFPB

Hester Peirce

Former Senior Research Fellow
Summary

The recent revelations about the goings-on at the Internal Revenue Service have gotten a lot of attention. When the patina of government impartiality shows itself so disturbingly thin, people of all political stripes sit up and take notice. The hard lessons drawn from the IRS experience should inform the broader policy debates about regulatory structure and oversight.

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The recent revelations about the goings-on at the Internal Revenue Service have gotten a lot of attention. When the patina of government impartiality shows itself so disturbingly thin, people of all political stripes sit up and take notice. The hard lessons drawn from the IRS experience should inform the broader policy debates about regulatory structure and oversight.

When the IRS activities came to light, the president expressed his disapproval and cited the agency's independence. As others have pointed out, the IRS is actually not-as agencies go-particularly independent. It is part of the Treasury Department, an executive agency that answers directly to the president, and the head of the IRS serves at the pleasure of the president. Nevertheless, the president's mention of independence reminds us of the importance of accountability in government-a government official who does not answer to anybody else can do quite a bit of damage without anyone noticing, let alone stopping her.

Our elected officials ought to be taking steps to ensure that other agencies do not follow the IRS's lead. If, instead, they refuse to subject regulatory agencies to basic accountability measures, they will help to clear the way for the next agency misdeed.

The need for accountability is relevant to a number of ongoing debates. The Senate is moving closer to a vote on the president's nomination of Richard Cordray to head the Bureau of Consumer Financial Protection. He is already serving in that capacity by virtue of a recess appointment that has been legally challenged, but Senate confirmation would give him a full five-year term in office.

Dodd-Frank intentionally made the CFPB super-independent and put all of its powers in the hands of one person, the director, who does not have to answer to anyone-not to congressional appropriators, not to House and Senate oversight committees, not to the American consumer, not to the chairman of the Federal Reserve (where the Bureau is technically housed), and not to the president. The president may remove the director, but only "for cause." Before the Senate votes to lock in Cordray's autonomy, it ought to ensure that Congress has the necessary tools to monitor him and hold him accountable. Otherwise, the president may one day be citing the director's independence as the reason that agency misdeeds went unnoticed and unstopped.

This week's hearings on the Financial Stability Oversight Council's annual report present another opportunity to incorporate the lessons from the IRS. The council is made up of the heads of the other financial regulators. With so many cooks in the kitchen, it is hard to know whom to hold accountable for the council's decisions-decisions that could fundamentally reshape the financial sector. The hearings offer an opportunity to explore ways to remake the council so that its actions are transparent, its members represent their agencies' views rather than their own, and its staff is properly supervised.

As it functions now, it is difficult to know who is making decisions at the council and on what basis those decisions are being made. The Government Accountability Office and others have noted this lack of transparency. The members of the council are the agency heads, rather than the agencies themselves, which increases the potential for conflicting signals coming from the council and the other federal financial regulators.

It would also be worth thinking about how the council's sister agency, the Office of Financial Research, can be made accountable. Its director serves a six-year term and, like the CFPB director, sets his own budget and answers only to himself. The OFR is a data collection agency, but the IRS incident is a reminder that even data requests can be wielded in a way that disproportionately burdens certain entities.

Our elected officials should use this moment to reconsider the design of the CFPB, the FSOC, and the OFR. These agencies must be accountable, transparent, and balanced so that the American people understand what these agencies are doing and why they are doing it. We can't eliminate government lapses of judgment through regulatory redesign, but we can make it less likely that they will go undetected and unpunished.