Introduction
The Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010 came as a necessary precaution after the recession saw to the loss of more than eight million jobs in the United States of America (Deloitte Practitioner, 2012, p. 3). This job loss was the largest to be experienced in the United States after the famous Great Depression of the 1930s. The Obama government signed the bill into law in 2010 in order to safeguard the public from a repeat of the 2008 economic disaster that culminated in major unemployment and consequent escalation of crime and numerous other social evils. This Act has implications on non-financial sectors such as borrowers from banks for the banks shall have to pass down their excess costs while lending out or require extensive collateral. This move shall pose a challenge to high-risk borrowers. Sectors such as pharmaceuticals that deal in OTC (over the counter prescriptions) shall also be subjected to stringent checks.
Senator Christopher J. Dodd (D-CT) and the U.S. Representative Barney Frank (D-MA) were the main sponsors of this Act, which underscores why it was named after them. It was proposed in the fall of 2009 and passed by President Barrack Obama a year later (Deutsche Bank, July 2010, p. 35).This paper shall review certain relevant provisions exhaustively including the following titles: IX, VII, VI, and IV. Additionally, it shall outline the major objectives of the Act, the tracking of the Act, since signing to date, include the policy analysis and relate it to both the business world and society, and finally conclude by its strengths, weaknesses, and the recommendations proposed for future legislators.
Objectives
Following the 2007-2008 economic sector avalanche, the DFA came in to save the day, mainly by protecting consumers from the “too big to fail” dogma that had seen many consumers suffering great losses as they tried to buffer the losses created by the recession (Dodd, 2010, p. 24). Additionally, the Act aims at preventing “bail-out” at the expense of taxpayers. Initially, the failing firms looked to taxpayers’ money to bail them out of crises. Towards this end, the main objectives of the Act include:
- The protection of US consumers from abusive financial services
- Bring to an end the concept of “too big to fail” that saw to the great losses imposed on taxpayers by the failure of large financial institutions
- Create a comprehensive advance alert system that shall prevent retrogressive actions or mere reactions to a failed system. At its worst, such a system should enable the other institutions that are yet unaffected to run for cover in good time.
- The introduction of transparency to derivatives and other poisonous instruments such as Over the Counter products and ensure that they do not contaminate the entire financial system again.
- Make the credit rating parties more accountable to the publics and authorities that they serve, thus ensure that these parties do not continue to misrepresent investment information, thus mislead investors seeking out mortgage backed investments and all other sorts of investments.
- Grant shareholders a say in the executive remuneration decision making and by so doing ensure that such decisions are favorable to the long –term running of the company and does not just benefit top executives personally.
Anticipated effects on business and society
The Act is very extensive in its provisions. In fact, it has hundreds of pages and is yet to be drawn out in full because most of these provisions are actually guidelines to the creation of new agencies that shall carry out the oversight and regulation policies intended by the Act. An example of such a body is the Financial Stability Oversight Council, which is an umbrella watchdog for the entire financial industry. An example of a duty performed by this body is the regulation of banks that are deemed too large to fail. What it does for such banking institutions is to break them down into branches that are more manageable and easily regulated.
The council regulates banks by, for instance, checking their lending capacity. If it is too high, it directs the bank to increase its financial reserve, which is to say the money held by the bank for non-borrowing purposes. Additionally, it requires the bank to have an efficient insolvency plan that shall enable it to shut down fast in the event that it gets insolvent or runs out of cash and needs to be liquidated. The Act also prohibits banks from owning personal profit funds other than customers’ funds and the threshold it sets to determine banks’ personal profits is three percent of the revenue (Morrison & Foerstor, 2011b, p. 2). They (banks) were allowed a two-year window period before the Act became enforceable in a bid to rid themselves of excessive funds. For derivatives like the credit swaps that banks formerly transacted in, the Act combines efforts with the Sarbanes Oxley Act’s Security and Exchange Commission, hereafter referred to as SEC, as well as its own the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) to regulate these. The lapse of the two years was formerly scheduled for July 2012, but by then not all the necessary rules had been put in place, and thus a year’s extension was granted (Morrison & Foerstor, 2011a, p. 45).
The council’s jurisdiction is not limited to bans only and extends to other lesser financial institutions such as hedge funds and trusts.
Insurance companies are not left out either since the Act creates a Federal Insurance Office (FIO) under the Treasury Department to overlook federal insurers such as AIG, which is one of the insurers that suffered greatly in 2008. For instance, the Federal Reserve had to part with $85 billion to keep it afloat after it failed to match the financial fill-ins required at the time. This amount was large enough to fund other critical government projects only if the right measure were put in place in time. The cumulative effect of these controls on insurance shall favor consumers since the minorities shall access cheaper insurance covers.
Credit rating firms are also provided for since the Act creates an Office of Credit Rating at the SEC headquarters. These firms played a major role in the 2008 recession because they were responsible for misleading investors by exaggerating the credit figures and by misrepresenting the extent of mortgage backed investments (Morrison & Foerstor, 2011a, p. 32). Currently, such firms have to proffer declarations that can be asked to recertify by the office of credit rating. The Act makes misrepresentation a culpable offense.
The body in charge of consumer protection is the Consumer Financial Protection Bureau (CFPB) and it discharges its responsibilities through several governmental organs. It prohibits unscrupulous business conduct by banks and issues such as risky lending are thus regulated. It also provides for a twenty-four hour toll free system through which dissatisfied customers can lodge complaints against unscrupulous financial institutions. As such, the firms that offer mortgage services are required to do so in plain English that laypersons can understand. Initially, the position on mortgages was rather oblique for requiring firms’ partial disclosure at the option of full disclosure only upon direct request. Since these standard forms were rather vague in their provisions, most subscribers were victims of fraudulent trading; at least at the point of disclosure (PWC, 2010, p. 5), fortunately, this Act makes that aspect a rarity. Whistleblowers are also provided for in the Act. In the event of Insider Trading or other corrupt security breaches, a whistleblower can inform the government or the relevant council provided for in the Act and obtains a financial reward for her troubles. Additionally, such a person is protected from discrimination or adverse treatment within the company or firm that he or she is working for at the time of reporting the fraudulence. In the event of such an employer displaying any inequitable conduct towards a whistleblower, respite is available at the courts by instituting claims against the party responsible.
Titles
Title XIV: Mortgage Reform and Anti Predatory Lending Act Dodd-Frank Wall Street
This section of the Act deals with the issue of vague mortgages. It makes it illegal for firms that offer mortgaging to distort information or withhold it from clients. Previously, mortgagees were easily duped by such firms especially because they did not understand the standard forms enclosing the terms and conditions. Worse yet, even if they did, these standard forms were very vague in their explanations of the contract that the parties were entering into, thus making it hazardous for consumers who often found out when it was too late. On the part of part of predatory lending, the same case applies. Predatory lending may be defined as a form of oppressive or unfair lending that could well support a claim of unjust enrichment. Such lending is prohibited by the law as it is often to the disadvantage of the consumer, which is against one of the main objectives of the Act. The institutions involved include banks, hedge funds, and other moneylenders.
Reform and Consumer Protection Act, Dodd-Frank Wall Street June 2010 at page 773
This segment of the Act introduces new prospective legislation for the parliament to propose and pass. Specifically, it deals with the consumer rights, meaning that it does not specialize on a specific segment like copyright or insurance alone. However, since these individual segments when combined create the business sector, the segment goes further to specifically direct these various sectors individually. For instance, in insurance, the segment relays the directive to the Office of Insurance to gather information that shall be necessary in grading the various insurance providers on the quality of services offered and by so doing determine whether or not the business segment of the industry is being oppressive to consumers. The net effect of this task is that there shall be cheaper insurance available to consumers in the minority sector of the economy at affordable premiums. Additionally, insurers shall be divested of their ability to deny insurance on shallow or petty grounds such as technicalities.
Title VI: Improvements to Regulations of Bank and Savings Association Holding Companies and Depository Institutions Dodd-Frank Wall Street Reform and Consumer Protection Act, June 2010 at page 226
Concerning banks, as outlined above, the emphasis is on the services they offer to borrowers. Risky loans shall be outdated especially since the Act specifically outlines the procedure to go about offering a loan. Other than that, the issue of bank funds is also tackled at this point because the Act provides that the bank shall not have any personal profit engineering funds that exceed the stipulated threshold of 3% of the bank’s entire revenue. The effect of this scenario is that banks were given a window period of two years, ending in July 2012, to dispose of the excess funds. However, since the promulgation of the requisite laws to ensure compliance has delayed, this deadline was extended indefinitely.
Finally, the Act requires banks, especially the large ones, to drop the mentality of “too large to fail” and that if they are too large, they be devolved into smaller manageable units or branches. Additionally, they should set up an elaborate insolvency plan to cater for emergency instances of insolvency with expediency.
Title IV: Regulation of Advisors to Hedge Funds and Others Dodd-Frank Wall Street Reform and Consumer Protection Act June 2010 at page 199
As noted above, the Act not only deals with banks, but also engages hedge funds and other institutions that are permitted by the federal law to transact business that is traditionally relegated to banks, specifically that of managing lump sums of funds for various consumers.
Title IX: Investor Protections and Improvements to the Regulations of Securities Dodd-Frank Wall Street Reform and Consumer Protection Act, June 2010 at page 870
The Act protects investors, both local and international, from misrepresentations especially by credit rating firms on the actual position of an investment before investing. It requires full disclosure from such institutions so that investors know the correct and accurate position of the investment they are about to contribute to in the process. Failure to meet this requirement shall lead to the culpable firms’ discipline through various channels. The investors and all consumers in general have access to a 24 – hour hotline to report any irregularity to either the government or the relevant authority.
Title VII: Wall Street Transparency and Accountability Dodd-Frank Wall Street Reform and Consumer Protection Act June 2010 at page 271
Regarding Wall Street, the Act puts forth a body that is very similar to the stock exchange to monitor lesser institutions. It requires transparency and accountability of all financial institutions and achieves this goal through the requirement that they file in their reports bi-annually. These reports are required to be authentic and devoid of any misrepresentations or outright fraud. The respective authorities reserve the right to seek for re-clarification on any matters that they may find confusing or not straightforward. The firms on the other hand are required to comply with any such directives.
Strengths
This Act is very extensive and covers about every area of business including Information Technology, credit swaps, and even medicine. Ultimately, it serves as a market regulator. It has a concept of Marxism in it especially regarding the principles of free market. However, unlike the traditional expected resistance to such controls, businesses seem to be embracing the Act because it serves to protect them from the failures they experienced in 2008. Consumers are the biggest benefactors of this Act because their interests are set above those of business owners, which, although in the short term may present a challenge especially in the transfer of accumulated costs down to consumers, is a benefit in the end. This assertion holds because in the end, when the Act is in place, it has in its provisions mechanisms that are pro consumer such as price regulations and the requirement of value proposition to customers required of Financial Institutions, (FIs) (PWC, 2010, p. 3). Consequently, they shall have a say in the prices of commodities as required by law. Additionally, even at its initial stages where businesses may feel that they have a loophole to exploit consumers by passing down costs, the Act provides a mechanism to regulate this option and firms shall be refrained from abusing the option of passing down costs. Therefore, this Act is sort of an umbrella legislation that covers almost all sectors of business and the spirit of the law is the protection of consumer interests as well as investor interests.
Failures
Since the enactment of the Act in 2008, not so much has been recorded in the name of enacting legislations pursuant to the Act. For instance, initially, banks were granted a window period of two years, which was calculated to end in July 2012, within which they should have disposed of any of their personal profit making funds that exceeded the set minimum of 3% of the revenue. However, this requirement is yet to become effective because the executing body in charge of ensuring that this regulation was compiled with has not been fully formed (PWC, 2010, p. 5).
By April 2012, the DFA still required the legislation of 398 subsidiary Acts. Since then, of 221 possible legislations, only 73 (33%) could be concluded while the other 148 (67%) could not reach the desired end at the set deadlines. Cumulatively, so far, only 108 (27%) of the total rules have been enacted, with 144 (36.2) still not even proposed yet. These figures, as represented in the chart below, present an upsetting and worrying perspective regarding the applicability of the Act because it is now three years since it was enacted yet it is yet to come into force (Deloitte Practitioner, 2012, p. 8).
However, it is not necessarily set in stone that the Act shall automatically fail and one of the factors that keep Americans hopeful is the reelection of President Obama. This move was a portrayal of faith in his capabilities and probably a hope that an extra term shall allow him to complete what his administration started. However, since there is so much housekeeping to be completed before the Act can become fully enforceable, Americans shall pay handsomely in the first decade or so of the enforcing of its provisions. Some citizens may not live long enough to reap the benefits promised by the Act. Additionally, there is the fact that America is a pioneer in instituting such legislation and so it is largely experimental and thus delays and hiccups are anticipated. Whereas the forecast is positive, it may turn out to be false elation, as the probable side effects of institution market regulation have not been explored exhaustively.
Perhaps, one of the reasons why the enforcement of the Act is sluggish is the extensive nature of the text and the massive requirement of legislation that is necessary to give the entire Act the whole force of law (Regulatory Reform Summit, 2011, p. 15). It is debatable that if the requirements were not so enormous or were half as complex as they presently are, maybe the parliament might have managed to pass the necessary legislations. This assertion especially hinges on the fact that there are other non-related laws that may need to be promulgated besides this Act that are just as important.
Policy Analysis
The DFA is a workable paradigm for the business sector and could be a very useful tool in fortifying the American business societies from a possible crash mirroring the 2008 recession. As stated on the schedule of the Act, this act is the first most comprehensive legislation to tackle the issue of the business sector or market systems centrally, since the Great Depression (TABB Group, 2011, p. 5). The fact that the Act was passed in the US makes the effect on the entire world’s economy compounded for the US being an economic giant affects the entire world. It follows that after the Act becomes enforceable and the relevant changes are executed, the rest of the world shall feel the difference (economic paradigm Shift) of trading with the US, assess its efficacy, and decide on whether to adopt the changes in their own countries. In any event, it would not be the first legislation pioneered by the US and embraced by the world.
However, since the US is the source of the law, the cumulative benefits accrued by states from the Act shall first be enjoyed in the country before they trickle down to the rest of the world.
Conversely, since, as stated above, this Act is the first of its kind, if there are any mal-effects to be suffered, the USA shall also pioneer in the same, which may have a positive feedback effect on the world economy, with adverse effects (Tower Group, 2010, p. 18). The biggest loophole on the Act presently is that presented by the Marxist inclination of the Act towards market control. If Marx were right on this particular argument, it means that within no time of enforcement, the US may be gripped in the bounds of a revolution and an excess of monopolies
Recommendations
Future legislators could avoid two possible things for their policies to experience less friction in coming into enforcement. One of these is simplicity. The DFA is very extensive and complex as it took almost a year to put it together; additionally, it is close to half a decade since it was passed yet it has not become fully enforceable. One way of ensuring this simplicity is by reducing the number and complexity of the regulations or mini Acts that need to be passed before the legislation can fully come into force. This move would save a considerable amount of taxpayers’ money and enable quick enforcement of bills that have been assented to in the process. Finally, it would have been wiser to specify the scope of the Act restricting its jurisdiction to a reasonable number of sectors. The second position is that in the event that it is impossible to simplify such an act, policy makers ought to make it a priority in the house so that they can complete all the requisite legislations before resorting to other matters.
Conclusion
This paper has handled the issue of the Dodd-Frank Act, specifically the effects it shall have on businesses and the society. It has reviewed several relevant titles, strengths, and failures, and finally recommended that in future, policy makers may want to address themselves realistically to the complexity of Acts of parliament. The law was necessitated by the second largest economic depression in the history of the United States, which was experienced in 2008. With this insight in mind, this paper holds that the Dodd Frank Act (DFA) is an attractive piece of legislation with the potential for great success in a business society and that the policy makers have done a good job in creating such a law. The Act will safeguard unsuspecting customers from scrupulous businesspersons who might decide to withhold critical information from clients during the purchase of good and services. If the Act were in place in 2008, many clients would have avoided great losses that they incurred due to getting half-truths concerning deals that they entered before the recession. However, it should have fully come into force by now and so the delay is a compromise to its sustainability, as it is an untested way of business in a country with the magnitude of the US economy. However, as it stands, it is a commendable legislation.
Reference List
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