Last week, President Trump fired the starting gun in the race to deregulate financial markets. The President kicked off a day of meetings with Wall Street leaders saying, “We expect to be cutting a lot out of Dodd-Frank.” The resulting two executive orders signal a 180-degree reversal to the global regulatory community.
In November, voters made their sentiments known when they cast their ballots an anti-establishment, free market presidential candidate. Since then, conservative lawmakers and the financial services industry have coalesced around a dramatic shift in political rhetoric towards banks - from demonized capitalists to heroes of middle class wealth generation.
We noted the beginning of this shift in November shortly after the presidential election. Now, the question is no longer whether the government has lost its appetite for regulation, but rather just how quickly will we see a complete rollback occur. As White House National Economic Council Director and Wall Street veteran Gary Cohn confirmed on Friday, “Today you’re going to start seeing the beginning of some of our executive actions to roll back regulation in the financial services market.”
Trump’s executive orders take aim at the Obama Administration’s post-crisis reforms, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act. One executive order requires the Treasury Department to conduct a 120-day review of financial regulation and report recommendations. The administration outlined Core Principles to guide financial regulation, including “foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis.” The move is largely symbolic as the administration’s intent to upend the law’s requirements is no secret.
This action marks a stark departure from nearly a decade of compliance-driven operations in the financial services industry. For years, banks have devoted seemingly endless time and resources to implementing massive regulatory change. We could see many of these regulatory requirements evaporate overnight.
Take the Volcker Rule for example. Banks are estimated to have spent between $400 million and $4 billion in Volcker Rule implementation according to the Office of the Comptroller of the Currency. The rule restricting proprietary trading is expected to be one of the first suggestions for cutting by this review effort as politicians allege it has caused banks to withdraw from trading, drying up liquidity and making it too difficult to raise money in the capital markets.
In addition to individual regulations, entire regulatory bodies could be on the chopping block. The authority of the Consumer Financial Protection Bureau and Financial Stability Oversight Council will likely be revisited. Proponents of defanging these regulators argue that excessive regulation of systemically important financial institutions has led to capital hoarding, while on the consumer side, the CFPB has made consumer credit too tight.
The second executive order follows in the same spirit of deregulation. The order requires the Department of Labor to delay its recently finalized rule expanding the investment advice fiduciary definition, requiring investment advisors to act in the best interest of their clients. The rule, which would have become effective in April, will be delayed for 180 days, during which the administration is expected to explore options for amending it.
The government’s preparation for what President Trump calls a “big number” on financial regulations could pressure regulators elsewhere in the world to similarly roll back regulatory reforms to remain competitive. Compliance officers and general counsel outside the US should be alert to the likelihood that all remaining momentum for completion of international post-crisis reforms may unwind, including Basel III, the Markets in Financial Instruments Directive II and the European Market Infrastructure Regulation.
It is worth noting that at this point that President Trump’s executive orders make no immediate regulatory changes. Congressional action will be necessary to amend existing legislation and the White House will be hopeful that the Republican majority in Congress ensures the passage of the amendments. White House representatives have already met with Republican members of the House Financial Services Committee to discuss how to execute Dodd-Frank reforms.
The Trump Administration may need to jump a few hurdles, Congressional Democrats in particular, to accomplish proposed deregulation. It will also be interesting to see how the president’s actions are received by the American public, who may not be ready to forgive bankers for the 2008 crash. We will have to wait until the 2018 midterm elections to find out.
Until then, however, President Trump and Congressional Republicans have set a rather coordinated plan into motion that will likely execute regulatory scale back in an expeditious manner. As this deregulation gains real momentum, the global regulatory community could very well experience a race to the bottom.