Senate Passes Financial Reform: What's It Mean For Consumers?

Last Updated May 21, 2010 11:40 AM EDT

The Senate passed the financial regulatory reform bill last night, virtually assuring final enactment of the most significant changes to bank oversight since the 1930s. The House already passed its version of the legislation at the end of last year. Washington watchers had originally expected the Senate to weaken the bill, as happened with the health care reform legislation. But while the Senate was considering the measure, its resolve was toughened by events like the recent "flash crash" 1,000 point stock market drop and the SEC's case against Goldman Sachs.

Now, the House and Senate will have to reconcile the differing provisions of their two pretty tough bills -- which aren't extremely different. That could happen sometime in June. Consumer groups are pushing for Congress to select the toughest pieces of each bill, but bank lobbyists will also be out in force trying to get provisions dropped or weakened. Here's a cheat sheet on the main pieces that would affect consumers:

  • Fiduciary standards. The Senate faked it on what I consider to be one of the most important provisions of the House bill. That's the one that would have required brokers and insurance salespeople to meet fiduciary standards -- to put the interest of their clients above their own interest in collecting commissions. (They instead have a lower bar, called a 'suitability' test, to hurdle.) The Senate bill simply directs the SEC to study the issue. Oh, yay... another study!
  • New skin in the mortgage game. Both the Senate and House bills require companies that package and sell mortgages to keep some of those securities in their own portfolios. Presumably, that would keep them from packing up crap and selling it to us.
  • Consumer Protection Agency. Yep, it's in there. The Senate bill places the new agency under the Federal Reserve, and charges it with protecting consumers from dangerous credit cards, loans, mortgages, and other financial products. That authority would extend to all lenders, including payday lenders and car companies, and not just banks. The House creates a separate, free-standing agency for this mission. Either way, it will have teeth, and either way, consumers shouldn't wait for it or fully count on it to protect them. Do you know how long rulemaking takes? We already have agencies to guarantee food and consumer product safety, and more recalls than you can easily count. So protect yourself by reading all the small print and not signing anything that doesn't make sense to you. But know that some day, in some way, you'll be protected against the most egregious financial traps.
  • Too big to fail. The Senate bill allows federal regulators to break up giant financial companies if they are in trouble and big enough to destabilize the U.S. economy. The House bill would collect money from big banks now to set up a $150 billion just-in-case fund to pay for that. The Senate would use taxpayer money; you can call it TARP II. Both bills would force financial companies to trade derivatives on an open exchange. The Senate version would require banks with access to the Fed's discount window to spin off their derivatives business. Don't expect that last provision to survive, since even the Fed is against it.
  • More panels, more talk. Both bills would establish a Financial Stability Oversight Council, made up of the top financial regulators. The Council would have to review systemic risk in the financial system, and would have the authority to raise capital standards for the biggest financial firms.
  • The insurance lapse. And speaking of more panels, both bills would also establish an "Office of National Insurance" that would study, but not regulate, the insurance industry. Here's something to think about: Insurance salespeople make big bucks on commissions and aren't held to fiduciary standards; the insurance industry doesn't receive tougher consumer oversight; and the Obama administration has been talking up annuities (which are insurance products) as a good way to save for retirement. Anybody out there see a new trouble spot developing?
  • Winners and losers. Your big bank stocks have already tanked in anticipation of this bill passing and the new regulatory era to come. But small banks may prosper, says a Reuters review of the legislation's beneficiaries and victims. Perhaps consumers will as well.
Photo by Wilhelmja on Flickr.
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