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Trump rolls back Obama’s anti-cheating rule

Six years of work to stop firms from cheating consumers were washed away as President Trump asked the Department of Labor to review the fiduciary rule

If my Twitter feed is indicative of events in the world, then Donald Trump is outraging people across the world with his first few actions as US President. Among the many things that have caused the upset is a memorandum he signed on 3 February. The memorandum seeks to roll back a US Department of Labor rule that makes financial advisers responsible for their advice. It is reasonable to ask the question: but weren’t they already responsible? No. They were not and it took the Barack Obama government a full 6 years to put together the ‘fiduciary rule’ to protect investors who put their money in retirement products sold by commission-earning brokers and insurance agents.

The Act (you can read it here: http://bit.ly/2le6TAY) made it mandatory for a financial adviser to act in a customer’s best interest, avoid conflicts of interest and tell the customer what she earns as compensation directly or indirectly. Basically, the rule wants financial advisers to stop cheating. Cheating, or pushing investors towards higher-cost and lower-return products, according to Obama’s Council of Economic Advisers, cost American investors $17 billion a year in fees and lost returns. You can read a fact sheet with more on this here: http://bit.ly/2klV7CM.

How did the advisers cheat? They steered money from customers into funds that cost more and gave lower returns. They ‘rolled over’ or churned older, lower-cost retirement products into newer ones with higher costs. Sounds familiar? It does. We’ve got the same big finance treatment in India too, but more of that later.

The fiduciary rule made the advisers responsible for what they sold and would have become effective 10 April 2017. You would d have thought that such a basic piece of regulation would already be in place. But big finance the world over has managed to keep consumer protection mired in mindless over-disclosure, spending on dud financial literacy efforts and big spends on lobbying, including funding murky research. The rule would have hit the $7.53-trillion retirement asset industry, which has pushed back, arguing that the new rule will cause firms to raise fees for consumers, cause an advice gap and limit choices for consumers.

Ostensible concern for consumers has been the trademark of most lobbying by financial firms the world over. Big finance has used two weapons to push against rules that mandate better behaviour. One, the rules will cause innovation to die. Two, poorer parts of the market will get underserved. Decode the corporate speak and you hear the real words—if we stop cheating we will not do the business.

In India we have seen some of these arguments against tighter regulations on advisers and sellers in the mutual fund space. In fact, the pushback by the industry in the US—as documented by this story http://ti.me/2liBsRW—has examples that the Indian lobby firms have tried, including worrying about the advice gap, getting so-called investors to write letters to the regulator against tighter standards and quoting studies that were compromised. Despite the corporate war chest and the heavy lobbying, the Obama government was going ahead with the rule starting 10 April 2017. But then the elections threw up a regime change that caused fears of a roll-back on this ‘stop cheating’ rule. In anticipation of a roll-back, senator Elizabeth Warren, known for her high-decibel fight against Wall Street and big banks, put out a report titled: Villas, Castles, and Vacations. Americans’ New Protections from Financial Adviser Kickbacks, High Fees, & Commissions are at Risk, to keep the pressure on. Read this report here: http://bit.ly/2jWTisL. The report documents the in-built conflict of interest in the annuity providers in the US. It says: “87% (of the companies)...offered kickbacks to their agents in exchange for sales to retirees. These kickbacks included luxurious all-expenses paid vacations...golf outings, iPads...expensive dinners...and sports memorabilia. And they failed to adequately inform consumers about these kickbacks, burying these in vaguely phrased disclosures hundreds of pages into their prospectuses".

But 6 years of work and all the arguments to stop firms from cheating consumers were washed away as President Trump asked the Department of Labor to review the fiduciary rule last week. It looks almost certain that the delay in implementation will turn into a full roll-back. Not just the fiduciary rule, but there are now threats to the post-2008 regulatory reforms in banks and financial markets leading to loosening of the regulatory architecture in the US. Remember weak regulation of Wall Street caused the 2008 crisis. As the US gets ready for another 1980s style regime of loose regulations, Indian regulators need to stay the course on prudent regulation and consumer protection. Innovation does not mean a licence to cheat.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, and on the board of FPSB India. She can be reached at monika.h@livemint.com

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