U.S. regulators are gearing up campaigns to preserve their consumer protection roles as the Obama administration marshals efforts to create a new agency, but face the political risk of appearing to side with Wall Street at the expense of consumers.

As part of the biggest revamp of financial regulation since the 1930s, the Obama administration has proposed a new Consumer Financial Protection Agency to shield consumers from abusive lending practices. The politically popular plan is a way lawmakers can show they are looking out for average Americans.

Many lawmakers argue that consumer protection has not been enough of a priority for existing financial regulators and that efforts in this area have come too little, too late.

Existing regulators, ranging from the Federal Reserve to the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, plan to respond by highlighting their strengths in protecting consumers.

The Federal Reserve, criticized for failing to stop mortgage-lending practices that helped fuel the U.S. housing bubble, has pointed to its much improved track record on consumer issues over the past couple of years.

It may also argue it has the needed in-house expertise, including an in-depth understanding of the economy and markets, as it seeks to retain authority to write consumer protection rules on products such as mortgages and credit cards.

Other bank regulators such as the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency -- which have examination and enforcement but no rule-writing authority -- are already making their case to lawmakers behind closed doors that regulating a bank and regulating the products it markets to consumers should go hand in hand.

Yet regulators have to be careful to avoid looking as though they are allying themselves with the banks they regulate.

They'd be in a much better bargaining position if the perception was they had done a much better job with protecting consumers, said Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution think tank.

Regulators, for the most part, would accept a new consumer protection agency in some form but they want to ensure it does not step on their toes, particularly in the examination process, according to a source familiar with the matter.

An alternative that some regulators are pushing is for a new agency to have back-up authority, stepping in only when it finds that the primary agencies are not adequately protecting firms' customers, sources said.

Agency heads are expected to be more open about their reservations when called to testify to Congress in the coming weeks. U.S. House of Representatives Financial Services Committee Chairman Barney Frank has said he wants to write legislation this month to create a consumer agency.


Given the political backlash the Fed has faced for its role in costly bailouts of financial firms, it is likely to keep its message positive.

It can point to a number of new hires, recent rules that have been approved or are in the pipeline and consumer outreach efforts to emphasize its commitment to consumer protection.

But it may be difficult to persuade lawmakers to give it another chance, particularly because the Obama administration is also pushing to give the Fed more powers as a new systemic risk regulator tasked with ensuring banks are not taking risks that could threaten the entire financial system.

The Fed could make the argument that in order to properly evaluate the risk profile of an institution it needs to look at the entirety of its operations, the way that banks are marketing products to customers and the amount of credit risk they might be taking on, said Randy Marshall, a managing director at risk and business consultant Protiviti.

That argument may not dissuade critics who feel regulators missed the warning signs as the housing bubble built.

If the current federal agencies had used the power that was given to them, then we wouldn't be in this financial crisis, said Elizabeth Warren, who chairs a congressionally appointed panel that oversees the Treasury Department's bailout efforts.

Fed Chairman Ben Bernanke acknowledged in congressional testimony last month that the central bank had been late to invoke its consumer protection powers as the bubble was building, but said it has been very aggressive in the past couple of years.

I think it's very important, if the Fed retains those powers, that we strengthen the priority that those have in our decision-making, he said.

Last year, the Fed approved credit card rules to curb unfair practices such as surprise fees and interest rate hikes, and new mortgage lending rules are expected this summer. It is also mulling rules to give bank customers the choice to opt out of overdraft programs that can involve fees.

The Fed has also become more proactive in directly reaching out to consumers, for example, sponsoring a public service announcement in movie theaters to advise consumers on how to avoid foreclosure rescue scams.

Other regulators have also been trying to raise the profile of their consumer-oriented responsibilities. The FDIC last month appointed Ellen Lazar, a respected fixture in the nonprofit world, to advise FDIC Chairman Sheila Bair on consumer policy.

(Editing by Leslie Adler)