No tricks and traps

Big business and banks do not like you. Well, let me rephrase that. They don’t like you getting a fair deal, but they like the money they can make off you. And they have the power to nudge policy and regulators to do what they want. Why else would each step forward in getting a fair deal to consumers of financial products need to be fought for so hard? It took the Indian banking regulator at least 10 years of work to change a grossly unfair formula that calculated the rate of interest we get on our savings deposit in such a manner that the least possible return would come to the retail consumer. The regulator is still unable to free the savings rate that is fixed at 4% when all other rates are linked to the market and is unable to stop the systemic defrauding of bank consumers by “relationship managers” selling unsuitable products. The story is larger and more scary at the other side of the world where the banks that were too big to fail brought the world to the edge and only taxpayer handouts and a leverage on the future taxpayer could save it. And we’re not so sure we’re out of the woods just yet. Or how stable the save is.

Also Read |Monika Halan’s earlier columns

But Wall Street is back in action. The next act of the drama to prevent an agency that gives the consumer a fair deal has already begun. Tomorrow, on 21 July, according to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) goes live. CFPB was created to fill regulatory cracks and overlaps (CFPB will stitch together the gaps and overlaps across seven regulatory domains) in the US financial sector that allowed sub prime mortgages to get the world on the edge of disaster and the riskiest financial products to be sold to those least able to absorb that risk. Over-leveraged banks pushed products certified and insured by entities with deep conflicts of interest and only profits and bonuses on their minds, never mind that the consumer will be left with a ticking time bomb around her neck. Regulatory cracks and overlaps made it possible for firms to shop around for the most lax regulator. The mandate of CFPB is to make markets for consumer financial products work.

The bureau’s goal, in the words of its chief architect Harvard professor and assistant to its president Elizabeth Warren, is: “No one should be tricked in any financial transaction. Prices and risks should be clear. People should be able to make apples-to-apples comparisons. Fine print should be mowed down, not used to hide nasty surprises. And, everyone—even trillion dollar banks—should follow the law.” Which political party in their right minds would oppose this, especially in the aftermath of the 2008 big bank-induced crises that hit the small guy the hardest? The Republicans have. In May this year, 44 Republican senators wrote to the Senate saying that they will block the appointment of the director of the bureau unless significant changes are made to the Act. The subtext: remove the teeth of the bureau and make it less likely to act. It is counter-intuitive to understand how the same 44 politicians can go back to the voters, who are also victims of institutional tricks and traps, to ask for votes when they so obviously are blocking something in their interest. Or maybe they know that votes can be managed by the large pools of funding that Wall Street makes available to them (sounds like India, no?).

Big business, banks, chambers of commerce have closed ranks behind the Republicans and are funding the blocking of CFPB. The first hit was the appointment of Warren as the director of the bureau, she got passed over for her deputy Richard Cordray. Her single-minded determination to bring fairness into retail financial transaction has spooked banks and other financial firms that have fattened on the fine print-driven obfuscation that got the retail buyer and borrower to sign off on documents that only a lawyer can decode. The political battle continues, but the bureau has its first actionable goal ready for work: a much-simplified mortgage disclosure form and a new consumer complaint process. Watch this space for updates on how that unfolds. And here’s hoping that our regulators are watching the events overseas as well.

Endnote: I was in a fascinating psychology course over the summer and one of the lectures was on viewing history through the lens of psychology. So the Greek civilization was the manifestation of the deep thoughts that the Grecians as a whole had about beauty. Sparta was courage. Rome was order and organization. Then, the lecturer threw the group a question: if we were looking back at ourselves from the future, what does our civilization represent? The pursuit of money—or barbarianism—was the consensus.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and can be reached at expenseaccount@livemint.com