Ask Minnesota bankers, financial advisers, stockbrokers, consumer advocates or scholars what they think of the 2,319-page bill known as the Wall Street Reform and Consumer Protection Act, and you'll get a couple of common responses.
The bill will create a powerful advocate for consumers, they say. But it will also bring some costly changes to the financial services industry -- especially in Minnesota -- which could ultimately hit consumers in the pocketbook. The mammoth bill was still evolving last week when the House voted 237-192 to pass it. The Senate delayed a vote until mid-July, providing time for further study, to say nothing of horse trading.
Assuming the bill passes and President Obama signs it into law, the lobbying will likely shift to rule-writing agencies. Chief among them, an embryonic Consumer Finance Protection Agency, which would be birthed under the auspices of the Federal Reserve, and the Securities and Exchange Commission, which is widely expected to adopt stricter "fiduciary" standards for broker-dealers and stands to gain supervisory authority over hedge fund and private equity advisers and credit rating agencies.
The breadth of the legislation makes it difficult to summarize. But here are some of the bill's highlights, as seen by Minnesotans who will be affected by the changes.
Consumer protection
Consumer advocates largely praised the legislation.
"It is a huge, huge gain for consumers," said Ron Elwood, an attorney with the Legal Services Advocacy Project who lobbies for consumer issues at the Legislature. "It finally centralizes authority in a truly independent entity whose only mission is to look out for consumers in financial transactions."
Auto dealers, who also provide financing for customers, won't be overseen by this new agency, though. Elwood predicts this exemption will be revisited in the future.
Additional benefits for consumers include: free credit scores for those denied credit or offered only higher rates because of black marks on their credit report; requiring lenders to determine whether people can truly afford a mortgage they're being offered; prohibiting incentives for brokers to steer homebuyers into pricier loans; and penalizing those who lend irresponsibly.
Tim Swierczek, president of the Minnesota Mortgage Association, said his industry is concerned. "We're for anything that's going to protect consumers, but not increase their costs or [reduce] their ability to get loans. And there's a very good chance that parts of this legislation are going to do both."
University of Minnesota law Prof. Prentiss Cox, a consumer advocate who helped draft some elements of the bill, bristles when he hears the lenders and others argue that financial reforms always come back to hit consumers.
"The companies that just took upwards of $2 trillion in public money to bail them out of bad loans that were possible mostly because of lack of effective consumer protections now want us to believe that we should oppose stronger consumer protections because it will cost consumers money," Cox said.
Banking
Joseph Witt, president and CEO of the Minnesota Bankers Association, says the bill has some laudable consumer protections, but adds that they have little to do with its original purpose -- "reining in Wall Street" and keeping banks from growing too large. He said the bill has 30 new regulatory compliance components affecting banks large and small, though smaller community banks, which predominate in Minnesota, had little to do with the subprime lending crisis.
He predicts a wave of bank acquisitions and mergers as smaller institutions join forces to pay the added costs of adhering to the law. "I don't think losing community banks is a positive thing for Minnesota," Witt said.
What galls him is that competitors won't be subject to the same set of rules. "If you go to a bank to get a car loan, the bank car loan is covered by this new [consumer protection] agency. If you go to an auto dealer and get a car loan, it's not," Witt said. Similarly, he said, "If you go to an insurance company and get a personal loan, which they certainly offer, it's not covered. If you go to Farm Credit Services and get a mortgage loan -- and they're very active in the mortgage lending business in greater Minnesota -- they're not covered."
Witt also criticized a provision that would require regulators to set the so-called interchange, or swipe fees, that banks charge retailers for electronic payments. But Buzz Anderson, president of the Minnesota Retailers Association, said it's a win for small shops and big boxes alike.
Will retailers' savings be passed onto consumers?
"Competition is really stiff in this day and age," Anderson said, noting that it will help hold the line on prices and might lead to price reductions.
Brokers and financial advisers
David Thetford, securities compliance principal analyst at Wolters Kluwer, said the legislation will bring significant changes to the financial services industry. Advisers working with hedge funds and private equity firms -- the so-called "shadow" financial system -- will come under the scrutiny of the SEC, he said. That means they'll need to keep books and records subject to SEC review.
The bill also raises the bar on "accredited investors" -- wealthy investors deemed qualified to take on risky investments. Among other things, the new law would change the minimum net-worth equation by eliminating the value of one's primary residence, meaning fewer people could meet the $1 million threshold required, Bettford said.
The SEC also will be able to bar stock brokers who misbehave from working in similar industries, he said.
"Once I screw up badly I can be locked out forever and I need to go find a new career," Thetford said.
The bill also will authorize the SEC, after a six-month study, to hold stockbrokers to a stricter professional standard, said John Taft, head of U.S. wealth management at RBC Wealth Management.
Currently, stockbrokers can recommend investment products that they deem "appropriate" for their clients' risk tolerance, while registered investment advisers are held to a higher "fiduciary standard," meaning they must recommend what they consider to be in their clients' best interest.
Taft, who chaired the private client group steering committee of the Securities Industry and Financial Markets Association, said the industry supports a uniform fiduciary standard.
"We think it's an important step in restoring the public trust and confidence that we as an industry say, no matter what kind of a firm you're working with or what credentials a financial adviser uses next to their names, that you are going to receive the same protections," he said.
Some smaller brokers say the costs of added regulation could force them to drop their less affluent clients. Taft said although that's a concern, he's optimistic the SEC will work with the industry to establish reasonable rules.
Insurance
Tom Burns, chief distribution officer of Allianz Life Insurance Co. of North America, said the insurance industry breathed a sigh of relief when the bill emerged without giving the SEC control over equity indexed annuities. These annuities are complex instruments that offer a certain return on an investment.
"We believe the equity index is an insurance product and not an investment" like stocks, Burns said. As such, they should continue to be policed by state insurance commissioners, he said.
Burns said the National Association of Insurance Commissioners has promoted a model act governing the sales of these annuities. Minnesota is expected to adopt the act in its next legislative session, according to an Allianz spokeswoman.
Dan Browning • 612-673-4493 • dan.browning@startribune.com Kara McGuire • 612-673-7293 • kmcguire@startribune.com
