Banks take revenge for new consumer rules

By David Lazarus

Jan. 6, 2010 12 AM PT

Happy new year. Now pay up.

That’s the message from our friends in the banking industry, who are introducing all sorts of fees and changes as a slew of regulations take effect designed to make financial heavyweights friendlier to customers.

From costlier checking accounts to higher credit card fees, banks are scrambling to find ways to compensate for as much as $50 billion in annual revenue that could be lost because of the tougher rules and requirements.

“This isn’t about a money grab,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, an industry group. “This is about covering operating costs and risks related to transactions.”

For instance, he said, banks will now be required to disclose contract terms more clearly and to notify customers in advance of changes to credit card terms.

“That means they’ll have to send out more letters, which has a cost,” Talbott observed.

And because banks will no longer be able to jack up people’s credit card rates willy-nilly, he said, that will expose issuers to more risk, thus creating more costs.

That’s one way of looking at it. Another is that banks are cheesed because lawmakers are showing some uncharacteristic backbone when it comes to consumer protection, and they’re turning the screws because, well, they can.

Never mind that just about all the big guys in the banking world are still on their feet primarily because taxpayers stepped in with billions of dollars in bailout cash. That’s ancient history.

Now it’s all about making up for the money that used to spill into bankers’ pockets from arbitrary rate increases and practices such as automatically signing people up for overdraft protection -- and then nailing them with fees whenever a transaction went over the limit.

Some new regulations, such as requiring 45 days’ notice for any significant credit card changes, were introduced last year. Others, including limits on rate increases and new disclosure requirements, take effect next month.

In response, many banks have been lowering the credit limits of millions of customers and raising rates. They’ve also been switching fixed-rate cards to variable rates that won’t be subject to the new rules and imposing “dormancy fees” for plastic that doesn’t get a regular workout.

But that’s not all. Talbott said consumers could look forward to even higher fees, revamped rewards programs and an end to some traditionally free services.

“The number of institutions offering free checking will decrease,” he said. “The market is responding to the regulatory changes.

“Providing services isn’t free. There’s a cost associated with providing credit cards or checking accounts.”

I love that banks are saying this is merely the free market in action. Where were all those market forces when these guys were making staggeringly reckless investments in mortgage-backed securities, or when their losses started running into the billions of dollars?

This isn’t about market forces. This is about good-old-fashioned greed, and the need to keep shareholders placated as the banking industry tries to adjust to a new era of transparency and scrutiny.

“The tricks and traps that the banking industry uses to ensnare consumers is a business model that needs to change,” said Sally Greenberg, executive director of the National Consumers League.

“What happened to the days when banks made an honest buck by treating people fairly?”

Did such days ever exist? Not that I can recall.

Outsourcing taxes

Speaking of money, the Internal Revenue Service said this week that it would finally require U.S. tax preparers to register with the government and meet federal standards for competency and ethics.

That’s great, as far as it goes. But what about tax preparers overseas, beyond the reach of the IRS?

Tax experts say that as many as 400,000 tax returns are outsourced to workers in India and elsewhere every year, and that the practice could grow rapidly if the IRS’ new rules make U.S. tax preparers more expensive.

Federal law requires that you be told in advance before your tax return is sent abroad. But not everyone who signs the authorization may realize that his or her Social Security and financial account numbers are leaving the country.

Selwyn Gerber, a Century City accountant, told me his firm experimented with outsourcing about a year and a half ago. Dozens of clients’ tax returns were sent to India.

“The work was technically OK,” Gerber said. “But there was a lot of stuff the Indians couldn’t cope with.”

Moreover, many clients, who Gerber said include celebrities and wealthy families with recognizable names, objected to having their confidential information shipped abroad. The danger of fraud or identity theft was too great.

“I don’t know how you maintain quality or privacy overseas,” Gerber said. “You just can’t do it.”

He said his firm quickly ended the outsourcing experiment.

Just something to keep in mind when you speak with your accountant or tax preparer as April approaches.

David Lazarus’ column runs Wednesdays and Sundays. Send your tips or feedback to [email protected].