Financial laws are designed to stabilize and protect the economy. Businesses depend on legal certainty and a stable economic environment to operate, develop products and employ people. Citizens depend on consistent interest rates and investment predictability. And together, citizens and businesses supply the capital that keeps the global economy running. Without financial laws, unpredictability and instability would undermine an otherwise functional system.
The framework of financial law also protects consumers. The issues vary, but most consumer protection laws seek to provide truthful disclosure of information to consumers, assure the solvency of companies, and ensure that all socio-economic groups have access to financial services.
The economic crisis that started in 2007 inspired a number of reforms to financial regulation. These reforms were enacted to prevent the irresponsible lending that contributed to the mortgage crisis. Reform efforts have also changed how credit card companies and banks conduct their business, and adjusted financial laws have forced these companies to become more transparent about their operations.
The Securities and Exchange Commission (SEC) regulates almost all aspects of the stock market. Under the Securities and Exchange Acts, the SEC makes sure companies disclose information about their policies and operations to consumers and to the government. Companies must also be forthcoming about their financial condition and any other information that could impact a consumer’s decision to buy securities. The SEC, along with the Commodities Futures Trading Commission (CFTC) , monitors the activities of broker-dealers and protects consumers from the impacts of unfair dealing, illicit trading and insider trading.
In addition to protecting consumers, this transparency also helps holding firms and lenders make decisions about whether to lend to or invest in certain companies. Building consumer and investor confidence provides an aspect of consistency and stability in the overall financial system.
In 2010, Congress made sweeping changes to financial regulation when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The bill was inspired by the mortgage crisis, bank bailouts and reports of unfair practices in the credit card industry.
The key portions of the bill will initiate several changes to our financial system. These changes will: consolidate federal agencies and create an oversight council to monitor and react to instability in the market; increase transparency in the regulation of derivatives including a requirement that they be traded on exchanges; and prevent banks from making speculative investments that can end up hurting consumers.
The Dodd-Frank Act also adds new international standards to improve coordination on accounting and lender procedures, and creates new rules for winding down bankrupt businesses in a way that minimizes impact on the overall economy. This includes giving the Department of Treasury the authority to undertake emergency lending if necessary.
Comprehensive consumer protection measures are also included in the Dodd-Frank Act. These measures regulate the activity of credit rating agencies and credit card companies. Credit rating agencies have to verify information before including the information in reports, and tighter restrictions control how that information can be sold or provided to employers. Credit card companies must disclose interest rates and true costs of debt to consumers, and they can no longer arbitrarily raise interest rates.
One of the biggest changes to the financial law system is the creation of a new federal agency, the Consumer Financial Protection Bureau. The bureau’s mission is to protect consumers from unfair, deceptive or abusive practices and assist other agencies in enforcing financial law.