Two years in the making, the new financial regulatory reform bill has arrived. Here are five ways it might put more money in your pocket - or at least keep it there.
Note: This is an abbreviated story about the just-passed Dodd-Frank Wall Street Reform and Consumer Protection Act. For more details on this important new law, please see What Financial Reform Means to You.
Ever since the near-collapse of the world economy in 2008, we’ve been waiting to see what Congress was going to do to prevent a repeat. The new financial regulatory reform law is designed to keep Wall Street from ruining life on Main Street, but it also does a whole lot more. Example? Specific provisions in the new law should prove profitable to consumers nationwide.
The following 90-second news story will give you the basics – watch it, then meet me on the other side for more details.
Now, here’s a more detailed description of ways you might profit from financial reform.
1. Lower “swipe” fees.
Interchange fees, also known as “swipe fees,” are charges merchants pay Visa and MasterCard for processing debit and credit card transactions. The fee for debit cards currently averages 1.6% – credit cards’ swipe fees average more than 2%. Under the new law, the Federal Reserve can cap the fees on debit cards (but not credit cards) limiting them to what they decide is “reasonable and proportional to the actual cost incurred.” Deciding what’s reasonable will will take months, but in Europe, Visa and MasterCard interchange fees are as low as .2% – in Australia they’re capped at .5%. Odds are that caps here will be higher than those charged on other continents, but lower than they are today. In lobbying for this change, retailers virtually assured Congress that they would pass along their savings to consumers.
2. Independent regulator for consumer loans.
The bill creates an independent regulator – think of them as a consumer cop – whose job it is to protect and serve consumers in ways that could help them financially. For example, prepayment penalties for most mortgage loans will probably be wiped out. This new agency could also cap interest rates on certain types of loans, standardize the paperwork required to get various types of loans, and increase disclosures to make loan fees and terms easier to understand. In short, this new agency could make borrowing more transparent and less expensive.
3. Free credit scores.
Consumers can already get a free look at their credit histories once every year from the big three credit bureaus – Experian, TransUnion and Equifax – by going to AnnualCreditReport.com. Currently, however, there’s no way to get a free look at your credit score: you have to pay a company like FICO $15.95 just to see it – something I’ve long considered a rip-off.
In its earlier form, the new law had extended that ability to credit scores as well, offering one free look at our credit scores annually. In the final version, however, the bill only allows consumers who are denied a loan or suffer some other sort of “adverse action” to get a free look at their credit score.
In addition to being turned down for a loan, other “adverse actions” that could result in a free look at your credit score include an increase in your cost of insurance, being charged more for, or being denied, a car lease, or if the interest rate you’re offered on a credit card or loan is higher than one being offered for those with excellent credit.
4. Honest advice from investment advisers?
The Senate version of the bill required that stock brokers and other investment advisers act as a “fiduciary” – in other words, to put their client’s interests ahead of their own.
This may come as a surprise to many, but today investment advisers at Wall Street firms like Merrill Lynch aren’t required to act as fiduciaries. As it turns out, the little guys on Main Street have been paying for a lesser standard, known in the industry as “suitability”. Investment recommendations made by retail stock brokers – often working on commission – have only to be suitable for the client, not necessarily in their best interests.
Example: Your broker calls and recommends you buy a particular mutual fund. The mutual fund would generally fit your investment profile – it’s suitable for someone with your risk tolerance, tax bracket and investment objectives.
What you don’t know, however, is they’re recommending that fund because it pays them more commission and thus costs you more in fees than other similar funds. Under the old rules of suitability, that’s OK, because the fund recommended was suitable. But not under the rules of a fiduciary, because they know there are better choices, and thus aren’t acting in your best interests.
Unfortunately, Congress didn’t include this provision in the final bill. Instead the new law directs the SEC to study this problem for six months – then gives it the authority to change the standard.
Count on consumer advocates – like us – to stay on top of the SEC and keep this issue from being buried.
5. More transparent derivatives trading
The ability of big Wall Street Banks to trade huge, unregulated derivatives contracts hasn’t been eliminated by the new law, but it has been curtailed. Many of the trades that in the past have been hidden from regulatory scrutiny will now be forced onto exchanges, where transactions will be more transparent. The reform bill also directs the Commodity Futures Trading Commission to create new rules designed to limit speculation.
While this provision of the bill may seem the least relevant and most obscure to many on Main Street, this change could theoretically provide the biggest change to the lives of many Americans in everything from the price of food to the price of oil.
To understand why, think back to July 2008, the days of $145/barrel oil and $4.00/gallon gasoline. While at the time the American public was assured that these prices were nothing more than the result of normal free-market supply and demand, some believe that the oil market was being artificially inflated by hedge funds and other big investors buying billions of dollars worth of oil futures contracts for no other reason than speculation. They claim that prices on Wall Street – and at the pump – weren’t a reflection of the balance between suppliers and consumers. Instead, speculative demand created by unregulated trading pushed prices up.
The new rules requiring greater transparency in the trading of derivatives contracts like commodities will make it less likely that undisclosed speculators will have the ability to manipulate markets. And this doesn’t just apply to oil – it applies to food and other commodities that many have accused of price manipulation in the past.
To get a greater understanding of derivatives, see our story What the Heck are Derivatives explaining what they are. Here’s an article from the Wall Street Journal (subscription required) that further explains how the new rules could affect the price of agricultural commodities.
Will these changes help?
You’ll note that many of the provisions of financial reform legislation started off as definite positives for consumers, only to be watered down by exclusions or being deemed a candidate for “further study.” That’s the result of negotiations in a polarized climate, when one side (Democrats) believes government intervention is necessary to protect consumers and the other (Republicans) believe that government intervention should be kept to a minimum.
What do you think – Is the new law strong enough? Or is it unnecessary regulation that will only serve to bloat the government and the deficit? Will it put more money in your pocket?