Some gain, some lose with financial reform
Last year saw the passage of wide-reaching financial reform with the Dodd-Frank Wall Street Reform and Consumer Protection Act. But any legislation attempting to overhaul the regulation of such a huge industry is bound to have its ups and downs for consumers.
Here is Bankrate’s score card for who won and who lost as a result of financial reform.
“In effect, you had a sales tax being imposed on purchases in general because, obviously, (merchants) are passing that on,” says Dean Baker, co-director of the Center for Economic Policy Research in Washington, D.C. Baker expects much of the savings that retailers realize on reduced swap fees to make their way back to consumers in the form of lower prices.
During the first days of the financial crisis, Congress temporarily raised the FDIC limit from $100,000 to $250,000 to protect savers from a rash of bank failures that continues to this day. The financial reform act makes that change permanent, giving savers significantly more protection for their money from the federal government.
The new financial reform legislation contains a host of benefits for credit cardholders. The newly created Consumer Financial Protection Bureau will keep an eye on the industry, listen to and act on credit cardholders’ complaints, and police credit card disclosure of terms and conditions to make sure they’re clear.
“(The bureau) will be able to react and stop bad practices in the credit card industry before they become pervasive,” says Kathleen Day, spokeswoman for the Center for Responsible Lending in Durham, N.C.
Seniors get a dedicated Office of Financial Protection for Older Americans within the Consumer Financial Protection Bureau to promote financial literacy, keep an eye on financial advisers who service senior citizens and coordinate with other government agencies to protect seniors from financial fraud.
But beyond that, this financial reform legislation tightens regulations on investing and reverse mortgages, two areas that affect seniors in particular, says Cristina Martin Firvida, director of economic security for the Washington D.C.-based AARP.
“Older consumers and investors in particular have a lot here to be happy with,” Martin Firvida says. “We will see a lot of new protections around the area of reverse mortgages, and typically older homeowners tend to take a reverse mortgage so that’s been an important win for us.”
Martin Firvida also cites the act’s treatment of so-called “senior designations,” or credentials that mark a financial adviser as an expert in managing seniors’ finances. The legislation contains incentives for states to adopt more stringent standards for who qualifies for such designations, Martin Firvida says.
Mortgage borrowers will likely see their borrowing options restricted to “plain vanilla” loans such as 30-year fixed mortgages and 5/1 ARMs. Oversight by the Consumer Financial Protection Bureau will likely mean that more exotic products such as option ARMs and interest-only mortgages will become more difficult to find. Mortgage borrowers will also benefit from fees, including points, being capped at 3 percent of the loan amount.
The new legislation establishes an Office of the Investor Advocate to help the Securities and Exchange Commission to identify problems facing individual investors and to establish regulations to address them.
Proxy access rules were also changed to make it marginally easier for shareholders to have a say in the composition of boards of directors. “They watered down the proxy requirement so it’s still very difficult for any but the very biggest investors to reach,” says Baker.
Also under the financial reform act, shareholders are now allowed a nonbinding vote on executive compensation.
For the first time, a newly created Federal Insurance Office will monitor all insurance on a national level, except health insurance. While insurance will still be primarily regulated by the states, the office will identify and research problems encountered by U.S. insurance buyers, especially low- and moderate-income buyers.
The financial reform act requires the new office to then share this information with state authorities and other federal agencies to improve overall government oversight of insurance companies.
This financial reform legislation provides grants to encourage state regulators to adopt stricter rules for marketing and selling annuities, which are insurance products that allow buyers to pay a lump sum in exchange for payments over a specified period of time. While annuities do offer security in the form of steady monthly payments, they can be plagued by high fees and onerous terms. More stringent regulation by the states may help address some of these issues.
Auto dealers sought and ultimately received an exemption from having their auto-loan broker operations monitored by the Consumer Financial Protection Bureau. That means that car buyers won’t be able to bring complaints about dealers to the bureau in the event they encounter abusive lending practices. Instead, they must to turn to the Federal Trade Commission.
Customers of small banks
Banks with under $10 billion in assets won’t be subject to the scrutiny of the Consumer Financial Protection Bureau. That means small-bank customers won’t have the same protections under the bureau when taking out loans or making other financial transactions as customers of larger banks. Baker, from the Center for Economic Policy Research, says that some small banks exhibited many of the same behaviors that got bigger banks in trouble and exempting them from the consumer protection bureau’s scrutiny is a loss for consumers.
Baker says that one area where financial reform legislation fell far short was the disclosure on 401(k) fees that are largely hidden from consumers. “There’s not a lot that regulates those or makes them more transparent,” Baker says.
Investors receiving advice from brokers
The Senate version of the financial reform bill had originally called for brokers to be held to a higher fiduciary standard when giving clients investment advice on what stocks to buy. Instead, the final version ordered a study into the issue and kept the standard that broker recommendations must only be “suitable” for a client rather than the “best” products for the client, as a fiduciary standard would have required.
Still, there is one bright spot: At the conclusion of the six-month study, the legislation gives the SEC authority to put the higher fiduciary standard in place.
Stockholders of financial firms
The financial reform act bans banks from many kinds of proprietary trading, forces investment banks to keep more money in reserve and cracks down on the over-the-counter derivative market that was wildly profitable for many financial institutions such as Goldman Sachs. Derivatives were one of the main instruments of mayhem in the financial meltdown.
Debit card holders
Users of prepaid debit cards
Investors who follow ratings agencies
Big and small investors often rely on ratings agencies to help them assess a company’s risk of default when buying stocks and bonds.
The Senate version of the financial reform bill had contained a mechanism that would have taken away ratings agencies’ incentive to pander to large clients by taking away the hiring decision from the firm seeking a rating, says Baker. Ratings agencies would have been assigned to each company looking for ratings by a private, independent clearinghouse. However, during the conference committee, the provision was delayed for two years to give the SEC more time to study the issue and to propose alternatives.