Consumer Financial Protection and Investment Banking

In a new era of financial regulation the Dodd-Frank Act stands out in front.  The act that created the Consumer Financial Protection Bureau (CFPB) is being praised for seeking less corruption, fraud, and financial malfeasance within, among other institutions, banks.

What Does the CFPB Do?

Essentially, the CFPB works to build a database of consumer complaints – the more complaints the bureau has the bigger it becomes. Says the CFPB, “Give us your input on prepaid cards. Consumers use prepaid cards to pay bills, make purchases, and to get cash. While these cards often look like and in some ways act like debit cards linked to bank accounts, they’re often very different. We want to learn more so that we can understand what protections might be needed for consumers – and we want your input.”  It’s only a matter of time until the streams of complaints coming in from consumers cause problems for businesses.

The big problem for small business

Though the CFPB may want to help consumers, it forces investment banking departments to turn new business to the streets as compliance costs rise and ‘riskier’ ventures are no longer financial viable.  Of course, cutting clients means less business, which means that the investment banking sector could be set to shrink.  Unlike the retail banking sector, where rising costs have already been shown to get passed down to consumers (free checking accounts, for example, are largely a thing of the past), investment banks don’t have as much flexibility, often operating on measures of the costs vs. the benefits of taking on a client. Retail banking departments don’t have these sorts of problems – a client deposit is a client deposit.

What does it mean for you?

If you’re looking for a job in investment banking you may need to look much further than you did before.  As Reuters mentioned at the beginning of the year, investment banks have the need for some significant cost cuts: “Even factoring in further headcount reductions of up to 20 percent and a 5 percent cut in non-compensation costs, returns would still be too low.

To reach a 13 percent ROE, banks will have to slash pay too – by a hefty 23 percent per head on average, JPMorgan reckons.  This was of course before JPMorgan’s massive trading loss and its speculated role in the recent LIBOR scandal. CFPB regulations will further cool jobs in investment banking and the financial sector generally.  Anyone thinking about getting a job in finance should make sure to take the CFPB into consideration and keep up to date on its cases.

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