Democrats led by Barney Frank on Tuesday slammed a proposal to grant additional consumer protection powers to the Federal Reserve, as the latest idea designed to unlock talks in the Senate appeared destined for the scrap heap.

Frank, chairman of the House financial services committee, described the plan as a “joke” in language that pits him against Chris Dodd, his Democratic counterpart in the Senate.

Other Democrats in the Senate and the House expressed scepticism about the plan, although the White House and the Democratic leadership in the House stopped short of declaring the proposal dead.

The Fed had appeared to be enjoying a surprising political renaissance when the proposal, which emerged after talks between Dodd, chairman of the Senate banking committee, and Bob Corker, his Republican negotiating partner, came to light on Monday.

Dodd has been struggling to find a compromise acceptable to Republicans amid hostility to a strong stand-alone Consumer Financial Protection Agency (CFPA), which was proposed by the Obama administration as a way to prevent the mis-selling of products such as credit cards and mortgages.

After other Democrats on the banking committee and beyond got wind of the plan to house the authority in the Fed, there was an immediate backlash that further clouds the prospects for financial regulatory reform.

The Fed has been under attack from Congress for months, with its bank supervision role, immunity from complete congressional audits and the election of members of regional boards all threatened by legislative proposals.

While the Fed has managed to fend off much of the criticism, with the strong support of Tim Geithner, Treasury secretary, the central bank was expected to have to give up its consumer protection remit.

Parts of the financial industry have welcomed the proposals, which go a long way to meeting the objection that a regulator charged with ensuring safety and soundness should not have to battle a separate regulator pushing a pro-consumer agenda.

“We still need to see the final details, but have long supported housing consumer protections with prudential regulation for safety and soundness in the same regulator,” said Scott Talbott, vice-president for government relations at the Financial Services Roundtable, a forum for the sector’s leaders.

But the US Chamber of Commerce – which has spent millions of dollars opposing the creation of the CFPA and claims it would increase the cost of doing business, with knock-on effects for the cost of credit to individuals and businesses – said it remained dissatisfied.

Senate aides continued to work on different areas of financial regulatory reform legislation last night but the CFPA stands in the way of publishing a bill that had been expected as soon as Thursday.

Source: Financial Times