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The regulatory changes proposed under the plan are broad. For UNI Finance, this is a first step to stabilise the financial system and for consumers to regain trust in the financial institutions.



According to the official White House document “A new Foundation: Rebuilding Financial Supervision and Regulation”, the US Federal Reserve (Fed) will be given the power to oversee any company, including hedge funds and private equity firms, that is deemed too big to fail, in other words any company whose failure could destabilise the financial system. These changes would make the Fed, which also is the US Central Bank, the most powerful financial regulator in the United States. The objective of this is to have one institution responsible for recognising systemic risks before they endanger the financial system.



To beef up risk assessment, the plan proposes to create a Financial Services Oversight Council, which would coordinate activities of the different regulators as well as require all advisors to hedge funds and private equity, whose assets exceed an amount yet to be determined, to register with the Securities and Exchange Commission (SEC). This new register is in aid of improving reporting on funds in order to determine any threat to financial stability.



The plan also foresees major changes in consumer protection. Indeed, one of the most important pieces of the proposed regulatory revamp is the creation of a Consumer Financial Protection Agency. This new agency would have broad authority over any company that provides financial products or services related to consumer lending, including credit cards and mortgages. Its powers would include regulating unfair or abusive practices, requiring better disclosure, and banning financial products considered too risky. Its role would also be to educate consumers about finance and define standards for simple products, such as mortgages.



Further measures are proposed in the area of consumer protection. For instance, it is planned that an “outside advisory panel” is created to watch for emerging industry practices and that fiduciary duty is established for financial intermediaries, such as broker-dealers and financial advisers.



For UNI Finance, these measures are a strong first step in the right direction. “The essence of change is in creating a culture to ensure that the business is about putting customers first”, said Oliver Roethig, Head of UNI Finance.



The Obama administration’s plan recommends regulators issue standards on compensation for financial firms for both executives and employees. A review of compensation practices with a focus on the identification of new trends that create risks will also be undertaken. This will be supplemented by proposed legislation in two different areas. One would require all public companies to hold non-binding shareholder votes on executive compensation packages. The other would require that compensation committees are more independent.



UNI Finance welcomes the Obama administration’s recognition that the remuneration systems of all employees may have consequences for financial stability. In the United States, sales pressure on bank employees is particularly strong and has led to practices that put the consumers and the economy at risk.



“Business practices must be changed so that employees are no longer forcefully encouraged to sell credit cards or mortgages or any other financial product to consumers who cannot afford it, don’t need it or will only lose money,” Roethig said. “UNI Finance believes pay and incentive systems at all levels should be realistic, sustainable, and customer-oriented.”



“If mortgage brokers, loan officers, personal bankers, credit-card associates and other bank workers had protections and incentives to stand up and sound the alarm on dangerous practices, we would not be in the same financial mess we are today,” said Anna Burger, from US UNI affiliate SEIU. “Moving forward, it will be critical to pass whistleblower protections so front-line financial workers can speak up and stop predatory practices before they lead to large-scale economic crisis.”



Other proposals address securitisation (originators should retain some economic interest in securitised products and the SEC should continue its efforts to improve the transparency and standardisation of securitisation markets), derivatives markets (the markets for over-the-counter derivatives and asset-backed securities should be regulated) and capital requirements (capital requirements will be reassessed and will become more pro-cyclical). In particular, private equity and hedge funds will be roped into increased capital requirements and tighter rules on leverage along with the other financial institutions.



The proposals still have to win the Congress’s approval. The White House hopes that this will be completed by the end of the year.



The document setting out the proposed regulations is available under Related Files.