Tension Between Regulation and Economic Activity

By David A. Wolfe, Attorney

In order to remain competitive in the marketplace, financial institutions compete to produce attractive financial products and increasingly with regard to their customer service. Maintaining a sound, clear and transparent legal framework for the administration of business activities in the financial market is important to maintain stability and promote competitiveness, and sets a major challenge for state and federal lawmakers.

Over the past few years, government supervision of the financial services industry has increased significantly. New regulatory measures attempt to reduce the risk of future financial crises and increase consumer protection, which sounds reasonable, but imposes a huge collective burden.  Stronger regulation significantly changes financial institution management and procedures, leading to necessarily higher costs. 

Most notable is the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and its establishment of the Consumer Financial Protection Bureau, (CFPB), which transferred rulemaking authority for several consumer financial protection laws from various federal agencies, including the National Credit Union Administration (NCUA), to the CFPB on July 21, 2011.  At more than 2000 pages, the legislation requires almost 400 different rules from more than 20 different federal agencies.  The Dodd-Frank Act requires the CFPB, when issuing a rule, to consider “the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from such rule.” 

Regulatory challenges are also reshaping financial business models. While new consumer protection laws may restrict banking fees and increase transparency, they will also reduce revenue and profit margins for many financial products and services. 
 
For example, in 2010, the Federal Reserve Board amended the Electronic Fund Transfer Act (Regulation E), which prohibited banks from charging overdraft transaction fees for ATM withdrawals or one-time debit card transactions, unless the consumer has specifically opted in for this overdraft coverage. The Federal Reserve estimates this change will reduce industry gross revenues for banks and credit unions by more than $15 billion annually.  Financial institutions have diverse products and customers, which allows cross-product and cross-customer subsidies, but efforts to recapture this lost revenue will cause financial institutions to eliminate free services and reallocate fees and charges across all products and customers.

While there appears to be increased recognition of the impact that rulemaking activity has on the financial sector as well as on the broader economy, attention to economic cost-benefit analysis in rule making activities should continue to be a priority for any regulatory agency.

David is an associate of Consumer Collections in the Michigan office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 248.362.6142 and dwolfe@weltman.com.

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