Update as of June 15, 2016 to reflect the DOL Fiduciary ruling issued in April 2016: The final Department of Labor (DOL) Fiduciary Rule disclosure requirements, as expected, appear to be less onerous than the initial proposal. The disclosures need to be in a form that “permits Retirement Investors to make informed judgement.” Disclosures of fiduciary duties, conflicts of interest and fees / compensation are still necessary and the firm needs to be able to provide transaction level to a Retirement Investor upon request.
The proposed Department of Labor (DOL) Fiduciary Rules are causing quite a lot of disruption across the Financial Services industry. The realization that some form of the proposed 2015 rule will soon be in force has created accelerated urgency. There has been great focus on understanding what warrants “investment advice” under paragraph (a) of the proposed Rule. However, a secondary requirement of the rule has been around the required disclosures that must be provided to the clients, which discloses all fees, commissions, 3rd-party payments, and costs associated with the trade. The disclosures will need to be in a format that is “reader friendly,” doesn’t use “difficult to interpret” language, and provides the information in a form that doesn’t make it onerous on the reader to understand.
The governments of the United States and other leading nations have been launching concerted regulatory initiatives that seek to promote both financial stability and fee transparency. A pivotal initiative, introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), has been the creation of the Consumer Financial Protection Bureau (CFPB), an independent regulatory agency within the Federal Reserve System. The primary objective of the act is to manage “conduct risk” and / or prevent UDAAP (Unfair Deceptive Acts and Practices) violations, while striving to maintain public confidence in the Financial Services industry in general. The CFPB has expanded its scope to monitor all financial services transactions & activities, which have an impact with direct consumer interaction.
One of the initial areas of focus was the result of the Card Act of 2008 which focused exclusively on disclosures added to card statements to cover fees, rate changes and amortization schedules. After the launching of the 1st generation of the new disclosures, there was a dramatic increase of complaints filed to the CFPB from consumers and consumer advocacy groups. The complaints were focused entirely on the disclosures’ format and language utilized, and the lack of consumer satisfaction in understanding the new disclosures when contacting customer service centers at the issuing banks.
An examination of the intersections between the proposed rules for the DOL and existing CFPB mandate identifies multiple areas where the CFPB will have a strong point of view about how the DOL disclosures are provided to the consumers and the interaction between Advisors and consumers.
Highlights of the CFPB Focus:
- Consumer protection with authority and independence: Created a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.
- Transparency and accountability for exotic instruments: Identifies and eliminates loopholes that allow risky and abusive practices to go unnoticed and unregulated — including over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers, and payday lenders.
- Executive compensation and corporate governance: Provides shareholders with a say-on-pay, and provides corporate affairs with a non-binding vote on executive compensation and golden parachutes.
- Enforces regulations on the books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest, and manipulation of the system.
The overview of CFPB gives you an idea on how it will help the consumers, but it also may have implications on how firms may respond to consumer complaints regarding disclosures, interactions with advisors, and the operations of customer service centers (inquiries about information of the disclosures).
The challenge for many firms will be how to explain the new disclosures and balance that with the spirit of the CFPB to meet client needs and keep the language easy to understand.