Financial Reform May Change the Face of Finance

The Dodd-Frank Wall Street Reform and Consumer Protection Act — signed into law by President Obama on July 21, 2010 — will likely revolutionize the country’s financial system. The sweeping legislation is the most far-reaching financial reform since the Great Depression, touching virtually every corner of the financial world.

The new law is designed to help shield consumers from abusive financial practices, protect taxpayers from funding bailouts for institutions considered “too big to fail,” and improve accountability and transparency in the financial system.

Only a portion of the provisions included in the lengthy act actually became effective when the bill was signed. It will be the job of various regulatory agencies to write the rules that govern the act’s implementation. Consequently, it may be weeks, months, or even years before consumers understand how the changes will work, and even longer before their economic consequences are fully known.

Consumer Protection

The cornerstone of the legislation is the creation of the Consumer Financial Protection Bureau (CFPB). The new agency will be under the Federal Reserve but is intended to operate autonomously. Its purpose is to provide the public with information about financial products and to help protect consumers from scams, hidden fees, abusive terms, and deceptive practices.

In theory, by requiring financial products to more clearly define risks, fees, and penalties, consumers may be less likely to become victims of fraud. And when fraud does occur, there will be one point of contact for them to call. Any institution that provides consumer financial products — from credit cards and payday loans to mortgages, auto loans, and other consumer products — will fall under the CFPB’s jurisdiction.

Anticipating Threats

Another new agency, the Financial Stability Oversight Council, is tasked with monitoring sources of systemic risk and creating rules to be implemented by various financial regulators to address those risks. Chaired by the Treasury Secretary and made up of the heads of the most significant federal financial regulators, the council will meet quarterly and will respond to emerging threats to the stability of the U.S. financial system.

There will be a slew of tough new requirements for financial firms, and regulators will have the power to step in and liquidate firms that may be on the brink of failure, eliminating the possibility that the financial burden would be placed on taxpayers.

Investor Protections

Several provisions in the bill will directly affect investors. Companies are now required to provide shareholders with a non-binding vote on executive compensation at shareholder meetings at least once every three years. The act also empowers the SEC to grant shareholders the right to nominate their own directors.

During the economic crisis in 2008, the FDIC raised the insurance cap on savings accounts and CDs to $250,000 (per depositor, per federally insured institution); previously the insurance limit was $100,000. The temporary increase was set to expire after 2013, but the new law makes the $250,000 limit permanent.

In addition to providing the public with financial information and assistance, the law also allows consumers to access their credit scores for free if they receive a negative outcome when applying for a loan or a job.

While supporters say the sweeping legislation will promote competition, critics believe the legislation is deeply flawed and will impede economic growth. They argue that the new law allows too much federal supervision of financial transactions and will do little to prevent another financial crisis.1

As always, we’re here if you have questions or would like to discuss your personal financial situation.

1) The Wall Street Journal, July 1, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.