Editorial: In rush to reform, consumers could lose

More than 30,000 Minnesotans call the state Department of Commerce each year with questions about the sometimes arcane and confusing products sold by insurance companies. It's not the sexiest work around, but Commerce Commissioner Glenn Wilson believes it's a vitally important consumer protection role.

That's one reason why Wilson and regulators from other states are less than thrilled with U.S. Treasury Secretary Henry Paulson's proposal to overhaul the nation's financial regulatory system by taking responsibility away from the states in favor of federal oversight. It will be a very cold day in Washington before a federal agency is equipped to handle all of the necessary regulatory functions currently performed by Minnesota and other state governments.

The Minnesota Department of Commerce regulates 7,000 agencies, 1,400 companies and 87,000 agents who do insurance business in the state. Imagine the complexity of shifting that burden to a federal agency. And keep in mind that insurance is just one of 20 industries regulated by the Commerce Department.

Paulson started working on his proposal long before "subprime'' became a dirty word. In his view, the current regulatory system is outdated and inefficient. "Everywhere I look, I see the plumbing hasn't changed to meet the realities,'' he told the New York Times.

No argument here on that point. Paulson deserves credit for starting a much-needed policy discussion about how the regulatory system could be streamlined to enhance the competitiveness of U.S. financial institutions while better protecting investors and consumers from financial malpractice.

The recent credit and subprime meltdown raises the stakes and gives Paulson's proposal more momentum than might be expected in an election year. Still, it's unlikely that there will be much if any action before President Bush leaves office. Even Paulson is quick to describe his plan as a preliminary "blueprint.''

That caution should encourage state regulators such as Wilson, who've been working to streamline regulation for years. The Minnesota regulator cited the Interstate Insurance Product Regulation Commission, which acts as a clearinghouse for insurance-product approvals, as a case study in state efforts to improve the regulatory process. The multistate compact has greatly speeded up the approval process, which had sometimes taken years in individual states.

Any overhaul of regulatory functions will have to strike the right balance between state and federal oversight. Wilson and other state regulators should have a significant role in developing a framework that improves business conditions while protecting consumers.

Either that or, when someone in Ely has a question about an annuity, someone in Washington should be ready to answer the phone.