The Dodd-Frank Act, formally the Dodd-Frank Wall Street Reform and Consumer Protection Act, is a federal law in the United States which became official statute on the 21st July 2010, when it was signed by President Barack Obama. The impetus for the bill was the economic crisis of 2007 and 2008; in the wake of the financial trouble, the US government were keen to introduce new regulation, in an attempt to prevent such a repeat.
Dodd-Frank ushered in the most sweeping financial regulatory reform since the Great Depression in the 1930s, with nearly every part of the United States’ financial services industry facing changes due to the bill. As with most financial regulatory legislation, Dodd-Frank has its critics and supporters. Some argue that the law is not tight enough and, as such, will not be able to prevent another financial crisis. Others say it is too restrictive on financial institutions and will therefore restrict economic growth.
Dodd Frank was part of reactionary US financial legislation sought to ensure that such a financial crisis would not reoccur. The final bill that was signed into law was intended to ultimately protect consumers and the general public, by promoting stability in the financial markets. The law improves accountability and transparency in the financial system, ends bailouts of “too big to fail” institutions, and protects against abusive financial services practices.
Dodd-Frank created the Consumer Financial Protection Bureau. The Bureau is an independent watchdog group housed at the Federal Reserve. It has the authority to ensure that consumers and the general public have access to clear and accurate information with regards to mortgages, credit cards and other financial products. It also protects against hidden fees, abusive terms, and deceptive practices from institutions. Such transparency is intended to end predatory lending and ensure that consumers will not find themselves in insurmountable debt.
Bailouts and Supervision
Another aspect of the regulation ends taxpayer funded bailouts. Rigorous standards and supervision are established to protect consumers, investors, and businesses. Individual institutions are no longer eligible to be propped up with bailouts. The Federal Reserve can still provide support throughout the financial system as a whole, however, tough new capital and leverage requirements are instituted which means growth is restricted. Failed financial firms are now able to liquidate in a safe manner.
Other features of Dodd-Frank also eliminate loopholes that allow risky and abusive practices to go unnoticed and unregulated. Shareholders are now afforded an influence on executive pay and corporate affairs. However, these votes are non-binding. Stringent new rules on credit rating agencies, which create transparency, have been designed to protect investors and businesses. A council has been created to identify and address systemic risks before reverent bodies are able to cause a threat to the stability of markets and economies. Regulators are given strong oversight powers to aggressively pursue fraud, conflicts of interest and manipulation of financial systems, which are deemed to be at the expense of the American public.
In general, the reaction to Dodd-Frank is generally thought of as a win for consumers and consequently, a loss for banks and financial institutions. The overall aim of the law is to hedge against the next financial crisis. This will be the ultimate test for Dodd-Frank. But one thing remains clear: the provisions of the law will (at least for now) protect consumers, increase accountability and the transparency of banks and financial institutions.
Sources: http://www.lseg.com/markets-products-and-services/post-trade-services/unavista/regulation/dodd-frank-swaps-confirmations-documentation-reconciliation-and-compression, http://www.sec.gov/spotlight/dodd-frank.shtml, http://www.cftc.gov/lawregulation/doddfrankact/index.htm