Has the end of financial services regulation arrived?

There has been increasing talk recently about whether we are on the brink of a wave of financial services deregulation. Fuelled initially by the delay in finalising the ‘Basel IV’ package, this dramatic surge of interest is driven by statements from the new U.S. Administration and Congress.

However, in my view, and to paraphrase Mark Twain, the reports of the death of regulation are an exaggeration.

President Trump’s 3 February: “Executive Order on Core Principles for Regulating the United States Financial System[1] and “Presidential Memorandum on Fiduciary Duty Rule”[2] are being heralded as marking the formal beginning of the end of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the US legislation aimed at addressing the causes of the 2008 financial crisis that came into effect in 2010.

However neither the order nor the memo, in themselves, change or repeal Dodd Frank, or any other legislation.

The order directs a review and report on whether existing laws and regulations need amending to meet the seven new Core Principles for regulating the US financial system.

These include empowering Americans to:

  • make independent financial decisions and informed choices in the marketplace
  • save for retirement
  • build individual wealth
  • advance their interests in international financial regulatory negotiations and meetings.

The memo similarly does not effect any change in the law. Rather it directs a re-evaluation of the fiduciary rule (due to commence in April) of the new Administration’s priorities as well as a consideration of whether or not it should be rescinded or revised if it does not align.

In reality

It would also be naïve to suggest that the 3 February order and memo will not eventually lead to some kind of regulatory or legislative change, or that President Trump and his Administration do not wish to significantly roll back Dodd Frank or even jettison the fiduciary rule.

National Economic Council Director Gary Cohn has indeed described the order as ‘a table setter for a bunch of stuff that is coming[3] and that the Administration will ‘attack all aspects’ of Dodd-Frank.[4]

It can certainly be said that de-regulation and cutting down regulatory process and costs is a top priority for President Trump. The ‘regulatory freeze’[5] Presidential memo and the ‘one in, two out’[6] executive order indicates this.

However, as to the question of whether there will be an end to financial services regulation, note Director Cohn’s comments that the Administration is not anti-regulation and that it wants highly capitalised and well-regulated banks.[7]

Even the text of the 3 February memo and order, as well as the ‘one in, two out’ order, acknowledge the continuation of regulation. One of the new core principles is ‘to make regulation efficient, effective, and appropriately tailored’. The memo suggests proposing a new rule to replace the existing fiduciary rule and the ‘one in’ of the ‘one in, two out’ likewise recognises there will be future regulation making.

So while financial services regulation is not about to end, efforts will be made to significantly amend and simplify it. And this will likely involve culling and replacing aspects of Dodd Frank.

Beyond the early term actions of the Trump administration, there is a long history of Republican efforts to change Dodd Frank. One example that gives insight into where US financial services regulation may be headed, is the Financial CHOICE Act. It was introduced by House Financial Services Committee Chairman Jeb Hensarling in September 2016 and is being revised for consideration in the next session.

The Act proposes a number of things including:

  • repealing the Fiduciary Rule and the Volcker Rule (which prohibits proprietary trading)
  • ceasing SIFI designation for non-banks
  • exempting banks from Basel III and related requirements if they simply have a leverage ratio of 10% or more – this would mean a very significant increase in capital held by many banks under current rules.

Other parts of Dodd Frank are not proposed for repeal, for example the framework for OTC derivative regulation.

The debate

Echoing some of the sentiments in the Act, Director Cohn has suggested an overhaul of the Financial Stability Oversight Council, the Consumer Financial Protection Bureau[8] and the designation of non-bank financial institutions as SIFIs[9]. He has also said that his team will be looking at the Volcker Rule.[10]

However Treasury Secretary, Steve Mnuchin, is supportive of its underlying principles but wishes to focus on ensuring it doesn’t impede market liquidity[11]. Director Cohn has expressed dissatisfaction with the Orderly Liquidation Authority[12], however there is unlikely to be a rejection of ending ‘too-big-to-fail’ given one of the new Core Principles is ‘preventing taxpayer funded bailouts’. Many predict the end of the Fiduciary Rule – the subject of the 3 February memo – but again wholesale repeal may be politically difficult given its investor protection aims.

The likelihood

It should be noted that although President Trump is moving quickly, changing material aspects of Dodd Frank, or any other legislation, involves various complex steps that could take years. It would likely include a review and consultation process, and then approval by both chambers of Congress, which is going to be tough given Democrats still have the ability to block most bills in the Senate.

Undoing the effects of legislation in itself will be a big task for both government and regulated. Dodd Frank is a huge piece of legislation and many parts have already been implemented by industry.

And now a caveat

Supranational rules are facing determined resistance. President Trump has made a stance against local implementation of global standards and pointed out that participation in international forums like the FSB, Basel Committee and the IAIS, is voluntary.

In a 31 January letter to FRB Chair Janet Yellen, House Financial Services Committee Vice Chairman Patrick McHenry has expressed similar disapproval and has directed the FRB to ‘cease all attempts to negotiate binding standards burdening American business until President Trump has had an opportunity to nominate and appoint officials that prioritize America’s best interests.’ [13] Brexit and other political developments in Europe indicate such sentiments may have traction outside the US.

Closer to home

Chinese President Xi Jinping has championed globalisation, including support for international agreements.[14] And there are no indications that the Australian government is planning to slash financial services regulation or cease the implementation of global standards.

APRA, for instance, has been tasked with making our banks ‘unquestionably strong’, which has been interpreted as positioning them in the top quartile of internationally active banks, and thereby pegging us to global practices.

The world certainly feels somewhat more uncertain at the moment. Nonetheless striving for safe and stable financial institutions is here to stay, and regulation, in one form or another, will play a key role in realising this aim.

Kevin Nixon will be a panellist at the AFR Banking and Wealth Summit, 5-6 April 2017. Visit this page for more information.

 

[1] https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states
[2] https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule
[3] https://www.wsj.com/articles/trump-moves-to-undo-dodd-frank-law-1486101602
[4] https://www.bloomberg.com/news/videos/2017-02-03/nec-s-gary-cohn-on-u-s-jobs-report-regulations
[5] https://www.whitehouse.gov/the-press-office/2017/01/20/memorandum-heads-executive-departments-and-agencies
[6] https://www.whitehouse.gov/the-press-office/2017/01/30/presidential-executive-order-reducing-regulation-and-controlling
[7] https://www.bloomberg.com/news/videos/2017-02-03/nec-s-gary-cohn-on-u-s-jobs-report-regulations
[8] https://www.wsj.com/articles/trump-moves-to-undo-dodd-frank-law-1486101602
[9] https://www.wsj.com/articles/white-house-plans-broad-rethink-on-regulating-big-financial-firms-1486116003
[10] https://www.bloomberg.com/news/videos/2017-02-03/nec-s-gary-cohn-on-u-s-jobs-report-regulations
[11] http://www.forbes.com/sites/antoinegara/2017/01/19/trumps-treasury-secretary-nominee-steven-mnuchin-takes-on-onewest-rescue-fannie-mae-taxes/#ab7d5a12b035
[12] https://www.bloomberg.com/news/videos/2017-02-03/nec-s-gary-cohn-on-u-s-jobs-report-regulations
[13] https://ftalphaville-cdn.ft.com/wp-content/uploads/2017/02/02155349/McHenry-letter-to-Yellen1.pdf
[14] https://www.weforum.org/agenda/2017/01/full-text-of-xi-jinping-keynote-at-the-world-economic-forum

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