Financial Reforms, Obama style.

This is the thirty third in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Managing financial crises: Under the present regulatory regime in vogue, Bank failures could be dealt with either by infusing outside capital, or through the bankruptcy route. However, these methods are suitable for normal financial and economic conditions, and not in crisis situations.
With a view to deal with disorderly failures of Banks impacting adversely on the entire system, a new resolution regime on the lines of the FDIC would be created to tackle the failures of BHCs and Tier I FHCs. The idea is not replace the bankruptcy laws which will remain in place.
A new and special process would be put in place on the usage of the special resolution regime. The authority to decide on the application of this regime would vest with the Treasury who will consult the President, and obtain recommendation of two thirds of the members of the Fed Reserve Board, as also the written recommendation of two thirds of the members of the FDIC. In case of broker deals, FDIC approval is not required and two thirds of the SEC commissioners may approve the same. Where a Insurance company is involved, then the Office of National Insurance within Treasury would come into the picture.
Three reasons must be cited and justified for invoking the special regulatory regime processes, as follows:
1) That the subject firm is either in default, or in danger of defaulting.
2) That the failure of the firm would have severe consequences for the system or economy, as a whole.
3) That the problem cannot be resolved with the usual set of tools to avoid sever impact on the financial system or the economy. That the use of the special resolution regime would either avoid or mitigate the adverse effects.
It is also proposed that the Treasury have the authority to resolve failing firms under the special resolution regime. The Treasury would take all necessary steps as required to deal with the crisis. Another proposal is to amend the Fed Reserve’s Emergency Lending Authority to individuals, partnerships, and corporations in unusual and exigent circumstances. The Fed would be required to obtain prior written approval of the Secretary of Treasury for making such decisions in future.
To be concluded.

Financial Reforms, Obama style.

This is the thirty second in a series of articles on the financial reforms initiated by the Obama Administration in U.S.A.

Encourage Savings and Retirement Plans:  While the savings potential of the American households is enormous, the actual rate of savings is really low.   Consequently, they are left with little money when they retire from active life.   And when hit by a severe economic crisis, as being witnessed now, they are the worse for it, without any source of sustenance, except doles.   The effect is indeed devastating.

In order to address the problem, employers would be encouraged to offer specific plans for retirement for their employees.   Employers who do not offer such facility to their employees, could opt for the Automatic IRS with opt-out.   And lastly, to offer incentives for savings related to retirement.   The auto IRA option would be designed in such a way as to make it a simple mechanism, that would serve its purpose well, without putting too much pressure on the beneficiaries.

The above savings mechanism would provide employees a way to protect their post retirment investments, and provide for a peaceful retired life.   It would be a meaningful way of ensuring security for the employees at the end of their productive life.

Increasing retirement security is a primary objective in respect of employee benefits.   The retirement plans would be structured to be transparent, and give detailed information about the risks, returns, costs, etc, of different schemes to enable them to make informed choices.

Conflict of interests in the structuring, operation and regulation of retirement plans would be removed to prevent harm to employee interests.

Accountability and oversight would be part and parcel fo the scheme to ensure protection of employee interests.   Further, these plans would be made accessible to the maximum number of people with the objective of eventually reaching every one.

Simplicity of the scheme, and ease of operation would be ensured to increase participation.   Automatic features of such schemes that encompass a wide swathe of intended beneficiaries woud be put to good use, to channalize savings into specific and designated schemes.  

Cost is another major consideration that can make or mar a scheme.   It would be ensured that retirement plans are not only simple, but also inexpensive to participate to make them more attractive.

                                                                                              To be concluded.

Financial Reforms, Obama style.

This is the thirty first in a series of articles on the financial reforms, initiated by the Obama Administration in U.S.A.

Accountability:  The reforms package proposes making the financial firms and public companies accountable to their clients and investors.   In this regard, the following steps would be taken:

Protection to whistleblowers:  Financial rewards would be used as a weapon to garner information about wrong doing on part of firms.   Whistleblowers would be encouraged to provide material information leading to enforcement actions.   A seperate fund would be set up to compensate whistleblowers.

Expand sanctions regime:  In order to better enforce federal securities laws, the sanctions regime would be expanded.   The sanctions would be applicable across the industry in all its activities rather than specific to particular segments.   Collateral bars would be imposed as part of the sanctions regime.   The system of fixing primary responsibility would be harmonized.

Executive compensation package:  Non binding shareholder votes on executive compensation would be introduced to exert influence on firms to rationalize the packages.   Executive compensation packages, especially, retirement packages, have come in for severe public condemnation with top executives of failed Banks and firms laughing all the way to their homes with a fat severance package.

Co-ordination council for consumer and investor protection:  The proposal is to set up a co-ordination council with the heads of the SEC, the FTC, the Department of Justice, and the CFPA or their designees along with state and federal agencies to plug the loopholes in investor and consumer protection laws.

This council would be empowered to :

1. Establish a mechanism for State Attorney Generals, Consumer Advocates, and others to recommend on various issues.
2. Report to Congress and member agencies every year giving recommendations for imporvement in consumer and investor protection.
3. Carry out studies and consumer testing to identify gaps to improve upon consumer and investor protection.

The recently established Investor Advisory Committee of the SEC would be made permanent by statute.   This advisory committee is made of a diverse mix of investors who advise the SEC on regulatory priorities including on new products, trading strategies, fee structures, and the efficacy of disclosures.

                                                                                          To be concluded.

Financial Reforms, Obama style.

This is the Thirtieth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Investor Protection:  Investor protection would be ensured by adhering to the principles of transparency, fairness, and accountability.

In order to enable the regulators and the CFPA to ensure adherence to these principles by the market players, the following steps are sought to be initiated.

1. The authority of the SEC would be expanded, especially in areas of critical importance, like disclosures.   The system of disclosures would be made more investor-friendly.
2. The SEC would be given new tools of trade to promote fair treatment of investors.
3. Broker-Dealers would be given a fiduciary duty towards their clients.   Regulations relating to investment advisers and broker-dealers would be rationalized to remove the confusion in this regard in the minds of the investors.
4. The responsibilities of these intermediaries would be properly codified, and made enforceable.   Even though the responsibilities of these two -the investment adiser and the broker dealer is different, the perception of the investors is otherwise.
5. One of the key areas of reform in the matter of investor protection would be to prevent financial intermediaries from misguiding the investors into products and services that do not suit either their appetite or their requirements, and are, in fact, more profitable to the intermediaries than the investors.
6. Another step in this direction of investor protection is the proposal to do away with the mandatory arbitration clauses in investor contracts at the initial stages.   That would leave the legal option open to the investors.

                                                                                                                                                                     To be concluded.

Financial Reforms, Obama style.

This is the twenty ninth in a series of articles on the financial reforms initiated by the Obama Administration in U.S.A.

Consumer Protection Reforms(Contd.):

Access:  The Agency would be required to perform the duties of ensuring that consumers, especially the neglected sections, have access to prudent financial services, leding and investment.

The Community Reinvestment Act (CRA), would be diligently applied.   The CRA would form a cornerstone of the implementation of the financial reforms.   Emphatic and rigorous implementation of CRA would help provide access to financial services to consumers and communities, who would otherwise fid it difficult to access them.   Low income households and such other depressed consumer classes would have access to financial products and services to imporve their economic conditions.

The Agency would have the sole right to assess and evaluate institutions under the CRA.   Further, it would be empowered to ensure fair practices in the financial services jungle.   For this purpose, it would have overall jurisdiction to develop and initiate an integrated approach that slants in favor of those constituents that stand the greatest risk of abuse and exploitation.

Fair lending enforcement is an area that was found to be wanting in the recent financial crisis.   Adequate importance would be bestowed upon this function, and the Agency would be provided with all the tools to get on with its job of enforcement, in a fair, and equitable manner.   It would hae authority to access information and data necessary for its job.   Especially, information of a critical nature whose misuse could cause a contagion spreading in the market and eventually leading to  a collapse.

                                                                                                                              To be concluded.

Financial Reforms, Obama style.

This is the twenty eighth in a series of articles on the financial reforms sought to be implemented by the Obama Administration in U.S.A.

Consumer Protection Reforms:  The following are the recommendations in regard to the consumer protectio reforms in the reforms package being initiated now:

Transparency:  To bring about transparency in the consumer products and services disclosures, the following steps would be taken.

1. Important information would be made mandatory for disclosure.
2. Scuh disclosure would be required to be simple, concise, and accurate.
3. No outlandish claims would be made about the products.   They shall satisfy the tet of reasonableness.
4. Make disclosures from the point of view of the consumers.   They should be dynamic and include developments as they take place, and moreover relevant to the consumers.

Simplicity:  The second important parameter to which the new reforms would adhere to, is simplicity.   Basically, there would be two categories of products-plain vanilla, and other complex products.   Consumers must be able to exercise informed judgement about their choices.

Fairness:  The success of any system depends on how fair it is to all of its constituents.   Consumers must have the benefit of a fair system that will take care of their legitimate interests.   In this regard, the Agency would be empowered to deal sitably with unfair, deceptive, or abusive acts and practices.   Further it would have authority to impose duties of care on service providers and other financial intermediaries.

Similar products would be subject to consistent regulation.   It is surprising that it was not so earlier.    Once this lacuna is set right, it would go a long way in brining about consistency in regulation.

                                                                                                                                                                        To be concluded.

Financial Reforms, Obama style.

This is the twenty seventh in a series of articles on the economic reforms initiated by the Obama Administration in U.S.A.

Consumer Financial Protection Agency(Contd):  One of the major responsibilities of the CFPA would be carry out periodic examinations and regulatory studies of all new regulations to assess their effectiveness, and to see if they fulfil the need for which they were enacted.
The relationship between the CFPA and the states in regard to consumer protection laws would be rationalized, to avoid conflicts resulting in poor implementation.   The states would continue to be free to enact tighter laws than the CFPA, if they deemed it fit.   Tough regulations expected to be laid down by the CFPA.

Proper co-ordination between CFPA and states is necessary to maintain the comfort level of the consumers and investors, though it can be quite challenging to the Agency to carry out its tasks effectively.

The CFPA would be empowered and enabled with the necessary paraphernalia to do its job well.   Research and development would be a major tool in its hands, apart from extensive data.   Collection of data relating to customer complaints would be quite useful to study the level of consumer satisfaction enjoyed, and take corrective steps.

The Agency would play a key role in educating the consumers on the various products, and help them in making informed decisions.   The Agency would also promote access to credit for the community as a whole.

Arbitration of disputes between consumers and service providers is another area where the agency is expected to paly an important role.

The Federal Trade Commission plays a vital role in the area of consumer protection.   It would be better equipped to play its role effectively.

                                                                                   To be concluded.

Financial Reforms, Obama style.

This is the twenty sixth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Protection to consumers and investors:  The complex, often incomprehensible financial products that flooded the markets prior to the crisis was beyond the capacity of a sizeable chunk of the investors, who burnt their fingers in such deals.

In order to offer better protection to investors and consumers, a new agency is proposed to be set up as follows:

Consumer Financial Protection Agency: 

1. The CFPA would be the only primary federal consumer protection supervisor to take care of the interests of consumers of credit, savings, payment, and other consumer financial products and services;  and also to regulate providers of such products and services.
2. The Agency would be empowered to protect the interests of consumers in consumer financial products and services, such as credit, savings, and payments products.
3. The Agency would strive to make the overall system consumer friendly.
4. The CFPA would be enabled to become an independent agency with adequate funding to enable it to play its role to the hilt.   It would promote independence and accountability in the consumer services processes.
5. CFPA would have exclusive right to make rules for consumer financial protection statutes.   That apart, it would be empowered to fill the gaps through rule-making.   Further, it would also have the authority to provide exemptions from its regulations.   One of the key responsibilities of the CFPA would be to promote and open access to financial services to all,especially the neglected sections of consumers.
6. The CFPA would have broad supervisory and enforcement authority over all the authorities that are covered under its mandate.  

It is also expected to work with the Department of Justice in enforcing the statutes under its jurisdiction in federal court.

                                                                                     To be concluded.

Financial Reforms, Obama style.

This is the twenty fifth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Facilitate operations of systemically important systems:  As discussed earlier, a robust and transparent system of transaction settlement is of primary importance for the financial markets.

A disorderly and inefficient payments and clearing system can play havoc with the transaction settlements system and destabilize the markets.

One of the major reforms suggested in the package deals with the inefficiencies of the current payments, clearing, and settlement systems, and suggests ways to improve the same.   An orderly and transparent settlements system ensures prompt compliance with respective obligations of the participants and ensures sufficient liquidity to the players resulting in overall comfort to them.

The problems encountered in the clearing and payments settlements system in the wake of the economic crisis has persuaded the authorities to consider giving access to Reserve Bank Accounts and financial services, and to the discount window for payment, clearing, and settlement systems.   Such facilities, especially the discount window access would be meant to tide over emergency situations, when the regular systems, either do not perform or not perform to the expected level.  

By providing access to the Federal Bank facilities for payments, clearing and settlements, a crisis like situation that can lead to an actual crisis can be avoided.

Systemically important systems would be obliged to adhere to high standards of competence and reporting requirements.   They would be required to maintain adquate liquidity to meet their payments obligations.   That would boost confidence in the systems, and contribute to overall well-being of the system.

                                                                                                                                            To be concluded.

Financial Reforms, Obama style.

This is the twenty fourth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

System of Payments Obligations:  Settlement of deals between market participants is one of the most important operations impacting on the proper functioning of the system.   The complexity of the financial transactions undertaken and the resulting complexity in the payments and settlements process poses a major challenge to the financial industry.

The Administration has identified two areas for special attention, and to ensure the proper functioning of these, several steps would be taken.

Systemically important systems:  As a first step, systemically important systems would be identified and standards would be set for their conduct.   Some of the important steps being initiated in this direction are:

1. Covered systems comprising of payment, clearing, and settlement systems that are so important, as to cause liquidity and credit problems in the event of their failure, would be classified as systemically important systems.
2. Such systems would be subject to regulation by the SEC or CFTC, as the case may be.
3. Appropriate risk management systems would be made mandatory for such systems.
4. On site safety and soundness examinations will be carried out at regular intervals.
5. Where changes are required to such standards, they will be initiated after suitable previews.
6. The market regulators like the SEC or the CFTC will have the primary authority to enforce regulations.   However, both will work in coordination to achieve the common goal.

Systemically important activities:  The broad characteristics of systemically important activities will be defined and necessary risk management practices would be initiated to ensure compliance to market discipline.

The responsibility to ensure compliance of the regulations would rest with the market regulator.   The Fed Reserve would have authority for the back up examination and administrative enforcement authority.

                                                                                                                                                            To be concluded.

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