Trump Administration Making Thanksgiving Turkeys Out of Dodd-Frank, CFPB, Volcker Rule, & FSOC
President-elect Trump stated he would dismantle the Dodd-Frank Act during his successful election campaign, so is this now beginning of the end of banking compliance as we know it? Trump’s claim is that Dodd-Frank has failed, and he has a point: enacted in the wake of the 2008 global banking crisis to tackle big banks which posed a systemic threat to the financial system, the big banks have simpler gotten bigger than ever.
Love him or hate him, Trump is going to be making some big changes to how financial institutions are run and regulated. Whether this will be for better or worse, only time is going to tell, but despite the Wall Street rally and bank shares rising 20% after the election, every compliance chief knows that change is coming.
So, what is the Trump administration likely to change?
We are a little light on details at the moment, however we can make some educated guesses.
Here is what I believe the incoming administration are going to start on:
The Consumer Financial Protection Bureau (CFPB)
The CFPB is on the chopping block and will be axed. Republicans have never liked the new regulator, which has been highly active in tackling credit card providers and mortgage lenders, claiming to have returned $11.7 billion to consumers.
Republicans believe it has simply added to the regulatory burden of banks, with the costs being passed down to consumers. Republicans also don’t like that its funding approval comes from the Federal Reserve, rather than Congress, nor that it has one director rather than a commission or board (something a federal court agreed with in October 2016, ruling the Bureau was “unconstitutionally structured”).
The fact that it is also the brainchild of Democrat Senator Elizabeth Warren, the scourge of Wall Street and large banks, makes it a target to tempting too pass up on, if only from a political perspective.
The Volcker Rule
The Volcker Rule restricts banks from making ‘speculative’ investments when the bank in question has taxpayer-backed deposits. Effectively, this is a ban on proprietary trading for banks which are caught by the Rule provisions. On the face of it, the Volcker Rule is sound, but even Paul Volcker himself has said he would prefer a simpler version, while the large banks have either been exceptionally slow in implementing it, or obtained a 5-year deferment back in August 2016.
The Volcker Rule is at risk because Republicans consider it to be stifling for banks, limiting their ability to create profit for themselves and their clients. Furthermore, they also claim the Rule limits the major banks ability to manage risk.
This said, Trump has stated his desire to put some form of Glass-Steagall back on the books, which effectively divided deposit-takers from investment speculators in the banking sector since the Great Depression through until the end of the century. This may simply be a case of changing the name of the regulations, but leaving them largely intact in substance.
The Financial Stability Oversight Council
The FSOC is also high on the list of immediate targets for dismantling from the incoming administration, not least as FSOC is headed by a Treasury secretary who is directed by the White House. I doubt very much that a new FSOC head is anywhere near the top of the list of transition appointees the Trump administration is seeking to fill.
FSOC has always been something of a controversy magnet, tasked as it is with designating and regulating non-banks, e.g. AIG, Prudential, and MetLife. The latter, MetLife, has been litigating with FSOC for the last two years on its designation as a regulated entity FSOC . Irrespective of the court rulings in the current appellate proceedings, FSOC continued existence is again, a purely political decision at this point.
Politics aside, there are other reasons for revamping FSOC, primarily that it has failed in its core mandate, i.e. to better coordinate strategy between the varying financial regulators. Instead, FSOC has been moribund and has not lived up to this promise, despite support for it from the American Bankers Association (ABA) even while they opposed Dodd-Frank.
President Trump, Democrats, Wall Street, and Competing Priorities
Shares in large banks leapt on November 9th in the aftermath of Trump’s election win, and so far (Nov. 22 at writing) these gains have largely stuck.
However, a word of caution here: President Trump is not a fan of Wall Street if you listen to some of the things he said while electioneering. Nor can he afford to ignore his base which is Main Street and rural America, and they not Wall Street, got him elected. Right now, there appears to be a honeymoon attitude where Wall Street is concerned, but if Wall Street gains do not translate into Main Street and small town America gains, there is going to be serious trouble within the Trump base and with the Presidency.
Further, even with the GOP controlling the House, Senate, and Presidency, they can still expect some resistance from opponents of deregulation. Senator Warren is not the only thorn in the side of banks and financial institutions, and many Republicans are uneasy at relaxing the rules put in place to protect against a 2008 repeat.
History is on their side: Glass-Steagall was enacted in the wake of the Great Depression, and it was not until after deregulation and repeal of that act that we experienced such a seismic financial event with the Great Recession. Simply removing the controls enacted by Dodd-Frank is not likely to get a pass from legislators of either color, and the new minority leader, Chuck Schumer, believes he has enough Republican supporters to nix an outright repeal.
Finally, there are other reform areas the Trump administration may be focusing its efforts on, notably healthcare and the tax code. Repealing the Affordable Care Act (ACA or ‘Obamacare’) was a keystone of the election campaign, but Trump has already backed off an outright repeal of that.
Tax code reform is long overdue in the US, but that is a mammoth project, and I believe it is unlikely to be tackled substantively if at all. That said, President-elect Trump has managed to continuously surprise us all, so we cannot rule anything out.
Compliance Software and Work Platform Implications
While many provisions of Dodd-Frank have been deferred by big Wall Street players, many others have implemented compliance regimes which do follow the rules. Dodd-Frank rules have become a way in which Wall Street now does business, and the longer this persists, the more likely it will be that the rules become baked-in and more difficult to change.
Being difficult to change has never been a reason for regulators not imposing change though.
The main implication is going to be how to manage compliance change for financial institutions when they already invested heavily in post-2008 systems. Now, they are going to need to be changed again, and this will be a serious test of the agility and flexibility of these compliance systems.
Despite an easing of compliance burdens, I can see quite a lot of pain on the horizon for compliance and IT teams in particular, as they effect system changes to handle regulatory changes. More strategically, any regulated entity is also going to need to keep a weather eye open for 2020, because all Trump administration changes could be reversed yet again. The case for regulatory change management is extremely clear.
While overall compliance costs may decline with less regulation, it will also become increasingly difficult to gain compliance budgetary allocations for change, after all, what will be the point when we can get a deferral until the next election cycle? If we want a compliant banking sector, no matter what the compliance regime, then we need truly agile and cost-effective compliance systems capable of doing the job with a great deal more flexibility and a lot cheaper than they are now.
JobTraQ and the Lean BPM Approach to Compliance
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