Dodd-Frank Wall Street Reform and Consumer Protection Act

Dodd-Frank Wall Street Reform and Consumer Protection Act 

The policy Dodd-Frank Wall Street Reform and Consumer Protection Act was passed Dodd-Frank Congress in the United States in response to actions taken by the financial industry that contributed to the 2007–2008 financial crisis. The act aimed to increase consumer and taxpayer safety within the US financial sector.  The legislation, which was named for its sponsors, Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), comprises a long list of provisions that are spread out across 848 pages and are intended to be implemented over a number of years. The Dodd-Frank Wall Street Reform and Consumer Protection Act was a significant piece of financial reform legislation that was passed in 2010 during the Obama administration. Often referred to as the Dodd-Frank Act or just Dodd-Frank, it created several new government agencies whose job it was to supervise the different parts of the law and, consequently, the different facets of the financial sector. 

The Orderly Liquidation Authority and the Financial Stability Oversight Council oversee the financial stability of significant financial institutions in accordance with the Dodd-Frank Act. The American economy might be severely harmed by the failure of these firms, which were thought to be too big to fail. Additionally, the law allows for restructurings or liquidations through the Orderly Liquidation Fund. Orderly Liquidation fund was established to stop tax funds from being used to support financial companies that have been placed in receivership by dismantling them. The council possesses the power to dismantle banks deemed excessively large and thus a threat to the overall financial system. Additionally, it has the capability to mandate banks to raise their reserve levels. 

Regarding clients’ outcome, the Consumer Financial Protection Bureau (CFPB) established under Dodd-Frank, is tasked with stopping predatory mortgage lending and assisting customers in comprehending the conditions of a mortgage before accepting it. This was in line with the popular belief that the subprime mortgage industry was the root cause of the financial crisis of 2007–2008. Mortgage brokers are discouraged by the CFPB from receiving larger commissions for closing loans that have higher fees and/or interest rates. Mortgage originators are required by law to refrain from directing prospective borrowers toward the loan that will yield the largest payment for them. In addition to handling consumer complaints, the CFPB also oversees other forms of consumer financing, such as credit and debit cards. It mandates that information be disclosed by lenders with the exception of auto lenders in a way that is simple for customers to read and comprehend. An instance of this is the simplified language currently used in credit card application forms. 

The DOL Fiduciary Rule 

Fiduciary rule is among the most notable policies enacted to improve ethical behaviour in financial services and enhance client outcome. The policy was enacted in 2016 and mandated financial advisors to act in the best interests of their clients when providing investment advice on retirement accounts. This meant that advisors were legally obligated to prioritize the clients' interests above their own, ensuring that recommendations were made with the sole intention of benefiting the client financially.  Fiduciary rule came into action after President Obama’s order that Depart of Labour (DOL) should prioritize clients’ interests.  According to the DOL, financial advisors should operate in their clients' best interests and prioritize their needs over their own.   The rule forbids advisors from hiding any possible conflicts of interest and mandates that all fees and commissions be fully disclosed to clients in US dollars (Investopedia, 2017). Although the rule was intended for good, recent research depicts otherwise. 

Studies have been done to look at the effects on the market for retirement savings since the initial draft of the rule was released in 2010. According to one study, the DOL's new rule will probably cause people to save less for retirement. Additional discoveries consist of: Because the value of 7 million IRAs is too low to qualify for an advisory account, individual investors with small-size accounts will probably no longer be able to receive retirement advice and assistance. Up to 360,000 fewer IRAs would be opened annually as a result (Milloy 2015). When it comes to retirement savings, individual retirement accounts are crucial. However, when individual investors lack the expertise or courage to navigate independently, the absence of an advisor poses challenges. 

DOL Fiduciary Rule should address the concerns raised by studies indicating potential negative impacts on retirement savings. While the rule aims to enhance investor protection by requiring financial advisors to act in their clients' best interests, it must also consider unintended consequences such as decreased retirement savings. To mitigate this, the rule should provide exemptions or alternative pathways for individuals with smaller accounts to access affordable advisory services without compromising the fiduciary standard. Collaboration between regulatory bodies, financial institutions, and consumer advocates can help design solutions that ensure all investors, regardless of their account size, have access to quality retirement advice and assistance. Balancing investor protection with promoting retirement savings is essential to safeguarding individuals' financial futures and maintaining the integrity of the retirement market.