The White House is proposing a realignment of the financial regulation that failed to prevent the latest recession, but will the proposals help protect consumers? There is a long way to go between the President’s proposal and the enactment of a law, but here are the highlights as the plan stands today.
The Financial Services Oversight Council, run by the Treasury, will “help fill gaps in regulation, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities.” They will have the power to gather information from any financial firm to identify risks. The Council will be composed of one leader from each of the federal financial regulators.
Not only banks will be regulated. Any company whose size allows its instability to threaten the stability of the economy will be within the scope of the increased regulation.
There will be no more federal thrifts.
Hedge funds and other private pools of capital will be required to registers with the SEC.
The government will create the Consumer Financial Protection Agency (CFPA). This agency stands to be one of the strongest in terms of ability to create and enforce regulations throughout the financial industry. The organization will focus on transparency, simplicity, fairness, accountability, and access.
Along with the elimination of federal thrifts, the Office of Thrift Supervision (OTS) will also disappear or be incorporated into other regulatory agencies. Interestingly, this is the one regulator bankers like. In the current environment, financial companies can often shop around for their favorite regulator, and the OTS has often been chosen thanks to their hands-off approach. OTS was the supervisor of choice for the failed companies IndyMac, Countrywide, Washington Mutual, and AIG. Other regulators were not immune, however.
Just like the FDIC helps banks fail in an organized manner rather than allowing the failure to spur chaos, the new regulatory system would do the same for all other large financial companies.
Penelope Wang from CNN explains how these regulations might affect consumers.
- Consumers will have access to “plain-vanilla” mortgages with simple terms and pricing. In my opinion, these are almost guaranteed to be more expensive thanks to the simplicity premium.
- Brokers will not be encouraged to “suggest” customers choose unaffordable mortgages.
- Some overdraft loan changes will require customers to opt in to overdraft protection.
- Regulators would enforce fair lending laws so more low-income families would have access to financial services.