This article was last updated on May 4
[Updated] Approved! Congress and the President have approved the financial reform bill (detailed below) that would revamp the nation’s financial regulatory system. It will allow for the creation of a consumer financial protection bureau at the Federal Reserve, give regulators new powers to liquidate failing financial firms whose collapse would threaten the economy and create a council of financial regulators to monitor systemic risk. It is aimed at curbing risk-taking by Wall Street firms and lessening the impact of any future financial crisis.
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Congressional negotiators approved a sweeping overhaul of U.S. financial regulation reshaping oversight of Wall Street banks, brokers and investment firms. It contains new laws covering how derivatives will be traded, credit agencies regulated, investor rights and more credit card company reforms. Consumers and business will be significantly affected over the next few years by the financial reforms.
Obama today praised lawmakers for agreeing on what he called the “toughest” consumer reforms in history. “Credit card companies will no longer be able to mislead you, The new rules in the U.S. will be a model for safeguards that “can protect all nations.”
Here’s how some of the main provisions will impact your financial and investing future:
- Banking stocks will not be able to generate outsized returns and high dividends as in the past because they can not take as much risk. Banks will be allowed to invest in private-equity and hedge funds, though they will be limited to providing no more than 3 percent of the fund’s capital. Banks also can’t invest more than 3 percent of their Tier 1 capital. The ban on propriety trading, in which a company bets its own money, may reduce profits. Goldman Sachs Group Inc., the most profitable firm in Wall Street history, has said proprietary trading generates about 10 percent of its annual revenue. The firm made $1.17 billion in 2009 from “principal investments,” which include stakes in companies and real estate, according to a company filing. To pay for the costs of the bill, negotiators agreed to assess a fee on banks with assets of more than $50 billion and hedge funds of more than $10 billion in assets to raise $19 billion over 10 years.
– A Consumer Financial Protection Bureau will be created within the Federal Reserve to police banks and financial-services businesses for credit-card and mortgage-lending abuses. Responsibility for these areas is currently scattered across a variety of government agencies, and experts say that creating a single supervisor will help make financial products easier to understand and not take unfair advantage of borrowers. While the bureau will be housed at the Fed, it will have independent authority. Led by a director appointed by the president and confirmed by the Senate, the bureau will write consumer-protection rules for banks and other firms that offer financial services or products. It will enforce those rules for banks and credit unions with more than $10 billion in assets.It will also impose regulations prohibiting brokers and bankers from earnings bonuses based on the type of loan they sell, which would reduce the incentive to write higher-risk loans.
– Free Credit Scores. If you get turned down for a loan because of your credit score, or are offered an interest rate you deem too high, you would have the right to see the score your lender is working with, for free. Consumers may currently see their credit report, but don’t have access to their FICO score. The new provisions in this bill will help consumers understand whether their lenders’ concerns are legitimate.
- Regulating $600 trillion derivatives and swaps market. Banks will be able to maintain their trading operations so long as they are used to hedge risk or trade interest rate or foreign exchange swaps, a victory for banks that were on the verge of losing the desks entirely. The proposal will force a fundamental shift in the industry, giving federally insured banks up to two years to send instruments such as un-cleared credit default swaps off to a separately capitalized subsidiary. Beyond the swaps-desk provision, the Senate legislation will push most over-the-counter derivatives through third-party clearinghouses and onto regulated exchanges or similar electronic systems, a measure that will make it easier for the market and regulators to track the trades. It will mean higher margin costs on some transactions.
– Auto Dealers Excluded. The bill exempts auto dealers from regulation by the new consumer bureau, even though they originate nearly 80% of auto loans. But it does make it easier for the Federal Trade Commission to crack down on abuses in auto lending, payday lending and check cashing. Regulation by the new consumer protection bureau would have driven up the costs of auto loans.
- Swipe Fee on Debit Cards limited. The Federal Reserve will get authority to limit interchange, or “swipe” fees, that merchants pay for each debit-card transaction. The fees for debit cards average 1.6%; credit card swipe fees average more than 2%. Under the new law, the Federal Reserve can cap the fees on debit cards (but not credit cards) to what is “reasonable and proportional to the actual cost incurred. The provision will take effect a year after enactment. Retailers will reap the benefits of this change by being be allowed to give discounts for cash purchases, meaning you might want to start carrying cash more often. This could cost banks billions of dollars each year, prompting them to move away from offering products like free checking.
The bill would be paid in part with $11 billion generated by ending the unpopular Troubled Asset Relief Program, the $700 billion bank bailout created in the fall of 2008 at the height of the financial scare. It would cover additional costs by increasing premium rates paid by commercial banks to the Federal Deposit Insurance Corp. to insure bank deposits. The increase would not affect banks with assets under $10 billion.
While the legislation addressed the causes of the last meltdown — and more — it left for later a restructuring of government-related mortgage giants Fannie Mae and Freddie Mac. Time and again, Republicans tried to shift the debate to the mortgage purchasing firms, to no avail.