U.S. Senator Chris Dodd has brought forward an ambitious bill that would strip the Federal Reserve and Federal Trade Commission of much of their powers to punish companies and hand them over to a new government agency.

From left to right, Barney Frank, Christopher Dodd and Barack Obama have all pushed for greater regulation of financial firms in the wake of the economic downturn that began in late 2008. (Gerald Herbert/Associated Press)

"When consumer protections are handled by regulators whose primary responsibility is to safeguard the profitability of the companies they regulate, consumer protections don’t get the attention they need," the Connecticut Democrat said in a draft version of his proposed legislation.

"The Federal Reserve … has repeatedly failed to act despite repeated demands from Congress [and] the Federal Trade Commission is responsible for consumer protections … but lacks the authority and capacity to examine them," he said.

The proposed body, the Financial Institutions Regulatory Administration, would eliminate the alphabet soup regulators that have led to weak, confusing regulation where problems fall through the cracks, Dodd said.

"We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them."

Executive bonus caps

Among numerous stipulations, the bill would provide shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations, Dodd said.

And hedge funds with values in excess of $100 million would be required to register and disclose financial data. Currently there are no such stipulations on the shadowy institutions.

The bill, inspired by last year's financial meltdown, will minimize “economic turmoil and protect the interest of taxpayers,” Dodd said.

It calls for the creation of the Consumer Financial Protection Agency that could curtail or ban a host of dubious — but lucrative — bank practices such as ballooning mortgages, excessive credit card interest rates and surprise overdraft fees.

Fed fights back

Though in favour of cracking down on the nation's lending practices, the Fed has repeatedly bristled at the idea that it might be supplanted as the country's dominant financial regulator.

"The Federal Reserve has the resources, the structure and the experience to execute an ongoing comprehensive program for effective consumer protection in financial services," Federal Reserve member Elizabeth Duke told Congress in July.

"We believe that replicating in another agency the deep expertise and full array of functions embedded within the Federal Reserve and used to support our consumer protection program would be enormously challenging."

'The Federal Reserve … has repeatedly failed to act'— Connecticut Senator Chris Dodd

The bill comes in response to a request made by U.S. President Barack Obama earlier this year that lawmakers overhaul financial regulation to make it more transparent, less open to abuse, and more resilient against the tsunami of perils that swept over the U.S. economy in the past year.

Critics counter that more bureaucracy would be unlikely to fix any problems and would merely add more layers of red tape to the process of consumer lending.

The Senate Banking Committee will review the legislation next week, paving the way for a floor vote by early next year.

U.S. lawmakers have brought forward numerous bills this year aimed at cracking down on unscrupulous lending practices and excessive interest rates. (Mark Lennihan/Associated Press)

Some of the proposed changes are already making their way through Congress as part of a bill brought forward earlier this year by the House financial committee chair, Massachusetts Democrat Barney Frank.

A key difference between the two bills is that Frank's bill would actually grant the Fed more power to ensure banks don't become "too big to fail" whereas Dodd's legislation seeks to hand some of the central bank's power over to a new body.

If approved, the new FIRA agency would be the ultimate governing body for U.S. financial firms. It would assume some of the roles currently held by the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

The Frank bill is scheduled to be voted on next month.