Remarks as Prepared for Delivery

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Thank you to the Consumer Federation of America. It’s an honor to speak at your Financial Services Conference. You are an important voice in Washington, a leader advocating for sensible financial regulation for consumers. I’m proud to join you in advancing consumer protection.

Today, I will talk about how financial stability is foundational for consumer protection. This weekend marks the 15th anniversary of “Citi Weekend.” As the Special Inspector General for TARP (SIGTARP), I testified before Congress about the decisions that regulators made that weekend to save Citigroup—for reasons that included protecting regular Americans.[1] Along with being one of the largest banks and derivatives players, Citi was the largest consumer finance lender and credit card lender in the world, one of the largest mortgage servicers and student lenders, and handled more than $3 trillion in transactions each day for hundreds of corporations.[2] Federal Reserve Board Chairman Ben Bernanke told SIGTARP that a Citigroup failure had the potential to block access to ATMs and to halt the issuing of paychecks by many companies.[3]

Protecting regular Americans is often the reason given for government intervention, including this year with the failure of regional banks. Treasury Secretary Janet Yellen testified before Congress in March, one week after two bank failures: “We worked with the Federal Reserve and FDIC to protect all depositors of the two failed banks. On Monday morning, customers were able to access all of the money in their deposit accounts so they could make payroll and pay the bills.[4]

Financial stability is foundational for customer protection.  As Secretary Yellen said, “Simply put, we care about financial stability because families and businesses benefit from a well-functioning system. Conversely, they bear the cost of its failures.; When the financial system works, it can be a powerful engine for economic growth…. A fragile financial system can generate deep pain for American households when it fails.”[5] As she said, the 2008 financial crisis showed how “pain was not evenly distributed. Families in the bottom half of the distribution lost decades of gains in household wealth–while the top lost little.”[6]

This echoes Chairman Bernanke’s 2008 testimony on the necessity of the TARP bailouts when he said, “the taxpayer is on the hook” if the system does not work the way it needs to work.[7] He testified, “People are saying, ‘Wall Street, what does it have to do with me?’ That is the way they are thinking about it. Unfortunately, it has a lot to do with them. It will affect their company, it will affect their job, it will affect their economy. That affects their own lives, affects their ability to borrow and to save, and to save for retirement.”

If consumers are on the hook, regulators should not wait for a crisis to consider their interests. Regulators should consider the impact on consumers when making any decision that could impact financial stability. Unfortunately, this does not always happen, unless a leader like CFA gets involved.

CFA’s role “to promote policies that are beneficial to consumers, oppose harmful ones, and ensure a balanced debate on issues important to consumers” is critically important. Too often the debate is not balanced, but heavily weighted in favor of industry seeking relief from rules.

Regulators can do more to help balance the debate on issues important to consumers. I recently encouraged “greater engagement with public interest groups before proposing changes to rules, just as we engage with industry.”[8]

Looking out for consumers is an important responsibility of regulators.  It is incumbent on financial regulators to balance policy debates, to engage with public interest groups, and to protect consumers, whether or not CFA or another public interest group submits a comment to proposed action.

And it is incumbent on all regulators to ensure financial stability—which is foundational to consumer protection.

To ensure financial stability, we need to regulate for the future with the lessons learned from the past.

First, our financial system has been much stronger since the financial crisis because of Dodd-Frank Act reforms. Let’s take advantage of that solid foundation rather than becoming complacent. Regulators should not roll backwards, returning to an era of unchecked risk taking that leaves consumers holding the bag.

Second, regulators should be clear eyed and steadfast in ensuring that financial institutions and other regulated entities are adequately managing emerging risks to financial stability.

Let me talk more about both of these areas.

Regulators Should Not Roll Backwards, Returning to an Era of Unchecked Risk

Dodd-Frank reforms were intended to stabilize our financial system, so that it can serve Main Street Americans. Congress knew that the 2008 crisis fell hardest on American families, consumers, and small businesses—those far removed from unchecked risk taking by Wall Street financial institutions. The Dodd Frank Act gave financial regulators, including the CFTC, the responsibility to curb excessive risk taking, require risk management, promote financial stability, and avoid systemic risk.

This is not an optional responsibility, but instead a requirement that is in the public interest.

The responsibility is on regulators to identify what actions may later impact financial stability. That is a challenge. Treasury Secretary Geithner told SIGTARP during our audit of the Citi Weekend that what is systemic “depends too much on the state of the world at that time. You won’t be able to make a judgment about what’s systemic and what’s not until you know the nature of the shock.”[9]

The nature of the shock for the failed regional banks this year was different than 2008, but still involved excessive risk taking and a failure of risk management that flowed from weakened capital and liquidity requirements from 2018. The banks didn’t collapse then, but they were not resilient to external stress.

These failures should be a wake-up call for regulators not to be complacent. Instead, regulators should be steadfast in ensuring that our nation does not return to an era of unchecked excessive risk taking that could impact financial stability. In 2011, I testified before Congress that rules designed to prevent systemic risk “are only as effective as their application” and that ultimately, we “rely on the courage of the regulators to protect our nation’s broader financial system.”[10] I am proud of the courage that the CFTC’s staff have shown in enforcing Dodd-Frank Act reforms in recent enforcement cases against Wall Street banks.

Post-crisis reforms have made our markets stronger and more resilient, but they should not be taken for granted. As Secretary Yellen said weeks after the failure of the regional banks, “Our prosperity depends on the work to safeguard financial stability before a crisis occurs – just as the implementation of a strong fire code can prevent a fire from breaking out.”[11]

As regulators consider action, we must consider unintended consequences, including in future stressed times. In other words, we must expect the unexpected.

Chipping away at post-crisis reforms one at a time may not immediately trigger a financial crisis.  However, Better Markets used an apt metaphor in a recent CFTC comment letter:[12]

In the complex world of financial regulations, it's crucial to remember that eroding Dodd Frank is like playing a game of Jenga. Removing a single piece may appear inconsequential at first, but with each successive extraction, the entire structure becomes weaker and closer to collapse. Therefore, it is imperative that the CFTC remain steadfast in implementing Dodd-Frank. Doing so ensures that it fortifies the derivatives markets against crises and prioritizes the well-being of legitimate businesses that rely on those markets, ultimately for the public’s benefit— much like skillfully maintaining the stability of a Jenga tower as it grows taller and more complex.

I do not know a single regulator who wants to be the one who pulled the wrong block. But the challenge is in telling which block that will be, or knowing all of the blocks pulled in the past. If as Secretary Geithner said more than a decade ago, we truly won’t know what is systemic until we know the nature of the shock, we as regulators must be steadfast in keeping the underlying structure of our financial system strong and more resilient to external shocks.

Remaining steadfast isn’t just prudent. It’s a Dodd Frank Act requirement in many instances that the CFTC make rules consistent with the public interest. Industry requests often center solely around competition and innovation—important public interests—but interests that may not account for financial stability. As Secretary Yellen has said related to pushbacks on the Dodd Frank Act, My response has always been that a stable and resilient financial system is not only compatible with responsible innovation and sustainable growth. In fact, it is a prerequisite for those goals.”[13]

I am asking the CFA and other public interest groups for assistance in helping the CFTC analyze the public interest, just as the CFA was an important voice in post-crisis reforms at the CFTC. One example is a CFA 2011 comment letter where you raised an unfair J.P. Morgan sale of derivatives to Jefferson County, Alabama to finance a sewer system.[14] This unfair deal, greased by bribery of county officials, forced the county to lay off workers, increase sewer bills by 400 percent, and ultimately declare bankruptcy. Your voice was instrumental in the CFTC enacting strong business conduct standards for banks who are swap dealers.

With such an important voice in Washington, I encourage you to continue to help the CFTC in analyzing the public interest. As a nation, we cannot allow improved financial stability over the last 15 years to lead us to relax our guard. To roll back Dodd Frank reforms. To roll back to an era of unchecked risk taking that will leave our financial system unstable and consumers holding the bag.

Regulators Should be Clear Eyed and Steadfast in Ensuring Emerging Risks are Adequately Managed

Financial markets have faced unprecedent emerging risk including the pandemic, Russia’s war on Ukraine, climate disasters, cyberattacks, a changing interest rate environment, and new technologies.

Determining how best to protect consumers and to ensure financial stability in a digital age is one of my top priorities. I believe that regulators should keep pace with technology or the most vulnerable will suffer. It’s also important that regulators not get stars in our eyes that blind us to the risks to financial stability or consumers. For those reasons, I sponsor the CFTC’s Technology Advisory Committee, a committee of technology experts who advise the CFTC on emerging technology.

Today, I want to talk about two areas of technology-related risks: (1) conflicts of interest and other risks arising from a market structure common to the cryptocurrency industry involving affiliated companies; (2) artificial intelligence.

Conflicts of Interest and Affiliate Risk in the Cryptocurrency Industry

The CFTC is seeing more cryptocurrency applicants seeking to change the traditional market structure of separate entities acting as exchange, broker, and clearinghouse to a bespoke “vertically integrated” market structure to accommodate their affiliates. Appropriate regulation does not mean that we automatically port over to regulated markets a structure that exists in the unregulated space.

Regulators should exercise caution in considering changes to market structure, and should first determine that it does not result in increased risk, especially to customers and financial stability. In October 2022, a few weeks before FTX’s collapse, I warned of financial stability risk in crypto, including in this area, saying: “Crypto-related companies may serve multiple functions that are separated into different entities in traditional finance…These conflicts present significant risk that in a regulated environment would be disclosed and resolved. In an unregulated environment, the full extent of these conflicts may not be disclosed or resolved, which could lead to cascading losses and contagion risk.”[15] We know how FTX’s story ended.

I advocate for a “same risk, same regulatory outcome” approach. This starts with the foundation of customer protections and guardrails that customers are familiar with, and expect, from other regulated financial products and markets. The traditional market structure contains inherent bumper guards—market discipline resulting from differing interests of different entities—and that promotes financial stability.

Adjusting for the reality of new technology is not the same as adjusting for new market structure. As I said while FTX’s application seeking its own bespoke market structure was pending before us, “On balance, regulators must be careful in allowing bespoke treatment that could increase financial stability risks—risks that are well in check with our existing framework.”[16]

To the extent that we stray from a tried and tested market structure, the Commission should undertake the hard work of identifying risks and what would be the “same regulatory outcome.” To that end, the CFTC put out a Request for Comment on the Impact of Affiliated Entities, and we received many comments warning about risks with this proposed market structure. The CFTC should take these warnings seriously and issue guidance or rules related to this market structure, as well as coordinate with other regulators.

Responsible Artificial Intelligence

Artificial intelligence is a consequential technology that could aid in breakthroughs in areas like healthcare, mitigating climate change, cybersecurity, fraud detection, and more. However, we have to manage risks so that we can receive these promises.

AI has long been used in financial services. In meetings with our registered entities, I ask about their deployment of AI. The Technology Advisory Committee that I sponsor actively covers responsible AI and includes experts in responsible AI from IBM and Brookings. We have held two public meetings including a presentation by the White House Office of Science and Technology Policy on the Blueprint for an AI Bill of Rights. We have created a subcommittee on Emerging Technology that is actively considering Responsible AI issues.

I am committed to responsible AI. Responsible AI is a statement about our fundamental values. It means ensuring that AI is designed and deployed in a way that aligns with all interests of stakeholders. It means ensuring that AI algorithms and outcomes are transparent, explainable, and auditable. Responsible AI means using unbiased data. Responsible AI means ensuring that it is used in a way that minimizes the potential for harm to individuals and communities. For example, this includes guarding against societal harms like bias, abuse, and disinformation. It can also include guarding against AI-enabled market manipulation, fraud, and cyberattacks.

In order to promote financial stability and protect customers, it is essential that regulators increase their capacity to understand AI and monitor how AI is being used in regulated financial services. In terms of protecting financial stability, particularly where it comes to AI models, there can be great promise and great risk. Data and assumptions matter. Concentration risk in AI is also a challenge given the costs of developing AI. SEC Chairman Gary Gensler has warned that excessive reliance on a few AI models could lead to herd behavior. The White House’s recent Executive Order on AI discusses the importance of competition.[17]

A critical issue with responsible AI is governance. Who is making decisions, including determining that the deployment of AI is responsible? This could relate to consumer protection issues like fair lending. More in the CFTC space, the use of AI for algorithmic trading, trade settlement, margin calls, collateral management or other areas that could potentially impact financial stability, should be accompanied by strong governance provisions. Governance is also important for investment advice or other areas that could touch on fiduciary duties or other regulatory duties, in order to ensure that the customer’s interests are held paramount to conflicting interests.

Where a technology like AI is rapidly evolving, regulatory coordination is especially important. The White House’s recent Executive Order on AI called on agencies to coordinate.[18] I expect that Elizabeth Kelly, who is speaking next, will say more about this.  I have been coordinating with Elizabeth and my fellow regulators on responsible AI.

Finally, I want to end by sharing two of my proposals to protect consumers.

First, last year, I proposed that the CFTC needs a new definition of retail customer given the increase in retail participation in cryptocurrency derivatives markets.; The current definition covers regular household customers, millionaires and hedge funds. Under my proposal, the CFTC would separate regular customers from the professional and high net worth customers. While some customer protections would apply to all, we could create new ones for regular customers. This might include for example, plain English disclosures so that they understand their rights and risks. I encourage the groups here today to provide input on the appropriate test for regular retail customers, and the kinds of protections they deserve that can be added while furthering financial inclusion.

Second, after seeing pervasive cryptocurrency scams, I re-proposed a National Financial Fraud Registry (which I first proposed in 2019). This would be a comprehensive record of federal fraud convictions and civil fines.[19] It would be one stop that the public can easily check before giving someone their money, trust or business. It would also ease government’s identification of repeat offenders. Existing databases like FINRA’s broker check are not sufficient. Most fraudsters are not brokers registered with FINRA. Consumers do not care which agency prosecutes fraud. They don’t want to search all corners of the internet. They care about not becoming a victim in the first place. I invite public comment on this proposal.

Conclusion

Regulators need to remain vigilant to ensure the stability and resilience of the financial system, which is foundational for consumer protection. We have to be steadfast in not returning to an era of excessive risk taking, and we have to be on guard for emerging risk. That includes protecting consumers in a digital age. We share with you the critical responsibility of consumer protection. To all of you in the trenches, looking out for consumers, know that you are not alone, and that you have my gratitude and support.