Bring the FTC into the 21st Century
David A. Balto
May 4, 2010
The financial reform effort faces an imposing set of challenges. In order to restore reliability to these markets, we need a comprehensive consumer protection regime to assure that the fraudulent and deceptive practices which helped lead to the recent recession are not repeated. As part of the consumer protection provisions in the Restoring American Financial Stability Act, the House of Representatives appropriately strengthened the powers of the Federal Trade Commission to pursue deceptive and fraudulent conduct.
Though these provisions are essential for consumers to be fully protected, they have created a recent firestorm of criticism, with claims that the “broadly expanded” powers would put the “FTC on steroids.” Colorful rhetoric aside, these changes are sound, necessary and long overdue.
The FTC-related provisions in the bill are quite straightforward and actually have been the subject of proposed FTC reauthorization proposals in the past. Few people realize that the FTC is handicapped by limited regulatory and enforcement powers. Unlike other federal regulatory agencies such as the CFTC and the SEC, the FTC is a second-class enforcer with limited powers. To address these limitations, the proposed Act gives the FTC the power to promulgate regulations pursuant to the Administrative Procedures Act (APA). This change is necessary and straightforward, and allows the FTC to effectively assist the new federal consumer protection regulators.
This provision has also raised the most significant controversy. Last week, several advertising associations wrote to various Senators claiming that these provisions are not a "necessary or relevant response to the causes of the recent recession." They could not be more wrong.
First, the FTC's current regulatory powers merely hamper its ability to effectively police deceptive and fraudulent conduct. Over three decades ago, Congress passed the Magnuson-Moss amendment to the FTC Act. These amendments created an elaborate and time-consuming procedure before the FTC could engage in rulemaking. Magnuson-Moss requires as many as 18 detailed steps before the FTC may issue a final rule, and by most estimates that process can take as long as ten years. Not surprisingly, instead of broad rulemaking, the FTC has for the past three decades been forced to rely on individual law enforcement actions to affect practices that harm consumers or competition. These enforcement actions are time consuming and expensive and have limited impact. Rulemaking, in contrast, can broadly address entire areas of problematic conduct the FTC has identified. The FTC typically works to protect the most vulnerable consumers, and the lack of effective rulemaking power severely limits the FTC’s ability to police the fringe firms who prey upon the vulnerable.
In a speech before the American Bar Association last week, FTC Consumer Protection Bureau Director David Vladeck gave several examples of how the lack of rulemaking authority hampers the FTC's ability to engage in sound law enforcement actions essential to protecting consumers during this period of economic downturn and particular vulnerability on the part of consumers. First, there are chronic problems involving sham debt settlement agencies, which deceive consumers about means to resolve outstanding debts. There are literally hundreds of firms engaging in these practices, and the FTC simply lacks the resources to prosecute more than a handful of consumers victimized by this sham conduct. If we do not allow the FTC to address these practices broadly, the resulting harm to consumers duped by fraudulent debt settlement agencies will be astronomical. As Director Vladeck has noted, “It is absurd for us to fight this battle with one hand tied behind our back.”
In addition, there are the problems involving the misuse of “negative options” on websites. Consumers frequently find charges added to their credit card bills are based on interactions with web sites which force consumers to affirmatively reject additional products and charges. Certainly the FTC can bring individual cases against firms engaging in these deceptive practices, but the number of wrongdoers in this market is almost limitless. A far superior and more efficient approach would be for the FTC to promulgate a rule dealing with the appropriate use of negative options. Case-by-case, piecemeal law enforcement would still permit tremendous harm to occur over the next several years.
Opponents of granting the FTC APA rulemaking powers suggest that authority will be misused and the FTC will begin to handcuff companies through needless regulation. History demonstrates those concerns are unfounded. Congress has granted the FTC APA rulemaking authority under the Telemarketing and Consumer Fraud and Abuse Prevention Act and the Children’s Online Privacy Protection Act. There is simply not a scintilla of evidence of regulatory abuse by the FTC under those Acts. There is no reason to expect anything different from extending APA authority to the full range of conduct protected by the FTC.
Joe Farrell, the Chief Economist at the FTC, has noted that, “well informed consumer choice is essential to the central nervous system of a well functioning economy.” In order for the Restoring American Financial Stability Act to provide a foundation for a stronger financial system, we need regulators with the full powers to attack fraudulent and deceptive practices. We should begin by giving the FTC the full range of powers so that it can effectively protect consumers.