Wall Street reform: How it could impact you

NEW YORK (CNNMoney.com) -- Congress is trying to crack down on Wall Street firms to eliminate the threat of a future financial meltdown.

To ensure that taxpayers and investors are protected, the legislation's main goals are to avoid bailouts, raise capital requirements at banks and force risky bets into the open.

If the bill currently before the Senate passes, it will inevitably affect Wall Street firms, but how will it impact consumers and individual investors?

Depositors

The Federal Deposit Insurance Fund, which provides stability to the nation's banking system, could gain some muscle through the government reforms.

While depositors won't gain any monetary protection beyond the traditional $250,000 limit, increased strength for the FDIC translates to better protection for depositors, said Scott Talbott, senior vice president of government affairs the Financial Services Roundtable.

The legislation will also create a consumer financial protection regulator, which will provide oversight for all policies related to bank deposits and payment products, including overdraft and ATM fees and procedures.

Though there are dozens of laws, such as the the credit card industry overhaul enacted in February, and several agencies whose missions include consumer protection, the authority is fractured and inefficient, said Travis Plunkett, lobbyist for the Consumer Federation of America.

A new regulator will consolidate the power so that its sole job will be to provide consumers with financial protection.

Borrowers

To safeguard against another taxpayer-funded bailout, reforms will require banks to increase capital requirements from about 4% of assets to between 6% and 8%, according to expert estimates. And they'll be required to boost liquidity and maintain a stronger leverage ratio so that a drop in asset prices won't be devastating.

But these proposed requirements that aim to protect taxpayer funds could be passed on to those seeking to borrow, Talbott said. To compensate for maintaining higher cash reserves, banks will either tighten up lending practices even more or increase the cost of credit.

However, Congress has said that the consumer regulator will try to eliminate unfair lending practices, including penalty fees for paying off mortgages early.

Investors

Investment advisers are legally required to provide information on investment products that is best for their client's financial situation and disclose conflicts of interests. But brokers and dealers are excluded from this Securities and Exchange Commission rule since they aren't strictly advisers.

But brokers often market themselves as financial planners and guide clients to certain funds that make their firm more money in addition to fitting invesment needs, all without having to disclose that interest.

The reform plan would impose a fiduciary duty on brokers when they give investment advice, forcing them to provide a reasonable basis on why their investment advice is the best for their client and disclose any conflicts of interest.

Furthermore, most contracts currently signed with investment advisers or brokers generally strip an investor's right to take a dispute to court, forcing the investor into an industry-run arbitration. The reform bill would give the investor the option of a court proceeding or arbitration.

Bank stock investors

The increased protection will make it more expensive to run a bank, and that extra weight is going to be shared by investors.

Banks will be challenged with higher expenses to comply with the government's regulations -- and that will squeeze profits, which are linked to share prices, said Jaret Seiberg, an analyst with Concept Capital's Washington Research Group.

In addition to higher costs, banks could also face slashed revenues. The Volcker rule, named for former Federal Reserve chairman Paul Volcker, limits proprietary trading. The rule would get banks out of the hedge fund business and prevent them from trading on their own accounts.

In fact, that bill could force banks to spin off their swaps desks that make these trades, cutting off the revenue stream which critics say provided the strength banks needed to repay government bailout funds.

Furthermore, the legislation aims to make complex and undisclosed financial transactions known as derivatives, which costs taxpayers billions to keep American International Group (AIG, Fortune 500) alive and are at the crux of Goldman Sachs' (GS, Fortune 500) fraud charge, to be regulated by moving the trades into a clearinghouse.

But even if Congress' provisions will make banks less profitable in the short term, banks could switch to being "long-term greedy," said Barbara Roper, Consumer Federation of America director of investor protection.

"The long-term interest of the shareholders is to have more stability brought to the firm," Roper said. "Investors should want them to make lots of money over the long haul rather than chasing short-term profits that wreck the long-term growth of the company."