While most Americans were glued to former FBI Director James Comey’s testimony before Congress last week, two financial regulatory measures dropped below the radar. House lawmakers passed a bill that would gut the Dodd-Frank financial reform legislation of 2010. If passed under its current form, the Financial Choice Act would give the president the power to fire the heads of the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, at any time for any -- or no -- reason. It would also give Congress power over the CFPB's budget, which means that lawmakers could defund the agency entirely. That’s a shame, because in the near six years since the CFPB was established, it has provided over $12 billion in relief for millions of consumers.
The CFPB was created out of Dodd Frank in order to create a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace. The agency’s main goals are to:
- Root out unfair, deceptive, or abusive acts or practices by writing rules, supervising companies, and enforcing laws
- Solicit and respond to consumer complaints
- Enhance financial education
- Research the consumer experience of using financial products
- Monitor financial markets for new risks to consumers
The CFPB has cracked down on the credit card industry, debt collectors, payday lenders for-profit colleges, mortgage companies and banks. The potential defanging of the bureau would be a big loss for consumers. Another big loss can be found in Section 841 of the Choice Act, which would repeal the Department of Labor’s Fiduciary Rule, the first phase of which went into effect on Friday.
As a reminder, the DOL fiduciary rule requires anyone who handles retirement assets and gives financial advice to retirement savers, to work in their clients’ best interest and to provide disclosure of conflicts, when they exist. The rule, which was created by the Obama Administration, was due to begin implementation on April 10th, but the Trump Administration put a 60-day hold to determine how the rule would impact the near $3 trillion dollar retirement savings industry.
In a surprise turn, last month Labor Secretary, Alexander Acosta said the rule would not be further delayed and so on Friday, a “fiduciary-lite” was born. The reason it is lite is clear: the rule will not be enforced until the Labor Department determines whether the second part of the rule, which is where consumer legal protections would be enacted, is necessary. Phase two was supposed to be implemented on January 1, 2018 and until that time, DOL will not penalize anyone who doesn’t follow the new standards.
While the DOL rule remains in limbo, the Choice Act goes to the Senate, where it requires 60-votes to pass. There is wide spread belied that eight democrats would not likely sign the bill as is and instead, the Senate is expected to craft a separate regulatory relief bill of its own, which focuses more on providing regulatory relief for small banks, rather than the stripping away of consumer protections.
One final note: Even in its original form, the fiduciary rule would only apply to retirement accounts—in non-retirement accounts, many professionals will still be held to a lesser standard, called “suitability,” which means what they sell you or advise you to do has to be appropriate, though not necessarily in your best interest.
There are currently about 80,000 financial professionals who already adhere to the higher standard. Your best bet is to ask your advisor or broker if she and her firm act as fiduciaries. If not, you may want to seek out someone who does, like a Certified Financial Planner, a CPA Personal Financial Specialist, a member of the National Association of Personal Financial Advisors or a Chartered Financial Analyst. You may also check out automated platforms through large investment companies or robo-advisors.
HERE COMES THE FED…
The Federal Reserve convenes its two-day policy meeting this week and is likely to raise short-term interest rates by a quarter of a percent. If so, it would be the second increase of 2017 and the third of the cycle. The rationale for the decision is likely to be something like this: Although the labor market appears to be slowing down this year, the unemployment rate has dropped to a 16-year low and the broader unemployment rate is now at pre-recession levels.
But wait, doesn’t the Fed have two objectives? The Fed’s so-called “dual mandate” means that it uses monetary policy to foster economic conditions that achieve both maximum sustainable employment and stable prices. While the central bank analyzes a wide range of labor market indicators, it has recently noted that the longer-run normal rate of unemployment that would satisfy the employment mandate is 4.7 percent. As of May, the unemployment rate is 4.3 percent, so on the labor front, the Fed is happy.
The price stability part of the mandate has been more difficult. The Fed wants the rate of inflation, as measured by the annual change in the price index for Personal Consumption Expenditures (PCE), at two percent. As of April, the PCE increased 1.7 percent and excluding food and energy, it was up 1.5 percent. So on the inflation front, there may be a case to be made that the Fed should do nothing at this week’s meeting.
The consensus sees the Fed erring on the side of increasing the target range for the federal funds rate to 1 to 1.25 percent, still quite low by historic standards. However, “the outlook for Fed policy over the rest of the year depends on how the FOMC interprets the conflicting evidence on the inflation and full employment sides of its dual mandate,” according to analysts at Capital Economics.