Banks Face a New Adversary

By Markets

For a long time, banks were largely free to decide how to treat their customers, as federal banking regulators prior to the financial crisis prioritized the safety and soundness of the industry over consumer harm. This changed in 2011, with the founding of the Consumer Financial Protection Bureau, or CFPB.

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As The Motley Fool's Gaby Lapera and contributor John Maxfield discuss in the latest episode of Industry Focus: Financials, the CFPB's focus on consumers' interests as opposed to the industry's means that banks can no longer get away with the same shenanigans that they once did. Listen in below to learn why Wells Fargo (NYSE: WFC) was the latest big bank to learn this lesson.

A full transcript follows the video.

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This podcast was recorded on Sept. 12, 2016.

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Gaby Lapera: Wells Fargo now knows that it's more likely to be examined by a regulator. It's under a regulatory microscope that perhaps it wouldn't have been under before. It's actually a really interesting side story to this. The Consumer Financial Protection Bureau -- which was the agency that brought a lot of these fines -- they are responsible for $100 million of the $185 million fine. They're a really interesting little agency. There was some doubt earlier in the year whether or not they were constitutional and they were even going to survive. Banks had been bringing suits against them.

It's going to be interesting to see what happens with them post this Wells Fargo case because clearly they caught a bank doing something bad against consumers, which is the whole point of the Consumer Financial Protection Bureau. We were talking earlier that all the other regulating agencies for banks, they are there to make sure banks survive and that our financial system doesn't collapse, but that doesn't necessarily mean that they're going to be on the outlook for consumers which is the whole purpose of the Consumer Financial Protection Bureau. Maybe this will add to their case to let them stay even if it's like they are reorganized or something.

John Maxfield: Yeah. You bring up probably the most important point for the bank industry, overall, that you can deduce from this case. Talking about the Consumer Financial Protection Bureau, it is pretty common that a new regulatory body comes out of a crisis in the banking industry. If you go back to the Civil War, that's when the Office of the Comptroller of the Currency came along. That's what's in charge of the national banks. After the panic of 1907, that's what led to the Federal Reserve. Then you had the Great Depression which led to the FDIC, the Federal Deposit Insurance Corporation. Those are the three primary, what we call the prudential regulators of the bank industry. What they do, their primary mission is to make sure that banks are operating in a safe and sound manner. Right? We see what happens when they don't in 2008.

What that means is that these prudential regulators are actually to a certain extent, trying to protect the banks from themselves. They are doing this. They are acting on behalf of the banks, to a certain extent. Now, the banks don't always like what the regulators, the prudential regulators, do but it generally is a pretty good thing for the industry from a safety and soundness perspective.

The Consumer Financial Protection Agency is a totally different animal, because it has no interest in protecting the banks. Its exclusive focus is on protecting the consumer, and because banks got so out of control in terms of how they treated consumers the last few decades, that means that the Consumer Financial Protection Bureau is almost innately adverse to banks. For the first time in history in the United States, we have a regulator in the banking industry that is actually opposed to the banks as opposed to on their side.

Lapera: Oh, I don't know. This story, the more you dive into it, the more complicated it gets. I think that we are running out of time, but final thoughts, think for yourself whether or not this changes your investing thesis. I think, generally, this is why people don't like banks. As we were kind of talking earlier with our own personal investing thesis, it doesn't really change it and because Wells Fargo is the least bad of many bad options. That's why people hate the banking industry in general. This is kind of a wait and see what happens in terms of further regulation for all banks, not just Wells Fargo. John, do you have anything else you would like to say?

Maxfield: Yeah. Just to reiterate in my opinion and I'm a shareholder of Wells Fargo, this does not change my investing thesis in a material way. However, there could still be implications from all of this that could change one's investment thesis. For example, if chairman and CEO John Stumpf eventually left as a result of it. Now, that's just speculating that that will happen. I don't think that that will happen, but that could. At that stage, I think it would be worth investors' time to sit down and to think whether something like that would, in fact, trigger you to adjust your investment thesis.

Gaby Lapera has no position in any stocks mentioned. John Maxfield owns shares of Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.