Much of President-elect Trump’s campaign platform focused on issues outside of the financial services industry, specifically immigration, trade, personal and corporate taxes, and healthcare under the Affordable Care Act. These issues are expected by some to garner the majority of his attention initially. Mr. Trump provided few specific or detailed (or, in some cases, consistent) plans for the financial services industry. While a great deal of uncertainty remains, public statements by Mr. Trump and his aides since the election indicate there will be changes proposed to Dodd-Frank financial reforms to replace elements of the regulation with new policies to encourage economic growth and job creation. So far, specifics on what might be changed are unclear but there appears to be a theme of less regulation and enforcement. Wide market speculation provides some insight into the areas where changes may occur.
Regulatory Climate in General
- Mr. Trump has called for a temporary freeze on new regulations, which could include rules that have been finalized but are not yet in effect.
- Mr. Trump has said that he believes the Federal Reserve is holding interest rates low unnecessarily. Industry speculators anticipate a rate increase in December and increased interest rates could favorably impact financial services operating margins.
- Financial institutions have invested significant resources into the postcrisis regulatory regime and many expect to continue the efforts going forward, especially with regard to some consumer and investor protection issues, on the premise that such changes are good for consumers and good for business, and, in some way, reflect Mr. Trump’s views during the campaign toward protecting consumers.
- International standards setting bodies, such as the Financial Stability Board and the Basel Committee on Banking Supervision, have been actively involved in setting global capital, liquidity, and governance standards for the financial services sectors, including insurance. It is unclear how the Trump Administration views ongoing participation with, or adherence to, these accords, though a U.S. protectionist stance could hurt global markets and result in similar responses by other jurisdictions.
Some of the areas where the new Administration may impact the financial services industry include the following:
- A new Web site established by the Trump Transition team states that the incoming Administration will be working to dismantle and replace the Dodd-Frank Act. This is consistent with Mr. Trump’s statements that he would like to eliminate or change significantly the Dodd-Frank Act based on concerns that the degree of regulation is overly burdensome to financial institutions and limits their ability to provide credit. With that said, the overwhelming market sentiment is that a full repeal of the law seems unlikely though changes could focus on:
– Increases to the $50 billion SIFI threshold for enhanced regulation of large banks
– Greater relief for community banks
– Less aggressive enforcement-Pullback of Volcker Rule restrictions-Changes to CFPB (including leadership, funding, and agenda – discussed separately)
– More lenient treatment for domestic institutions than global institutions on international accords
– Elimination of the Financial Stability Oversight Council and nonbank SIFI designation – potentially affecting insurance sector and financial market utilities.
- An alternate regulatory framework proposed by Jeb Hensarling (H.R. 5983, the Financial CHOICE Act) may influence the direction of some of the changes to the Dodd-Frank Act. Under the CHOICE Act, well-capitalized institutions would be exempt from capital and liquidity requirements (including Basel, GSIBs, living wills – but retaining stress tests) if they maintain a specific leverage ratio. The legislation would also do away with the Volcker Rule restrictions on bank’s trading and investments, repeal the Financial Stability Oversight Council, revamp the CFPB and designate an Inspector General for the agency, revamp the SEC, strengthen FIO as the representative for the United States, and increase accountability and costs for fraud. Many of these items appear consistent with the direction of the new Administration.
News sources suggest that this legislation could be modified to be “palatable” to Senate Democrats and if so could have a high probability of passage in 2017.
- It is also noteworthy that Mr. Trump has taken exception with the compensation levels afforded the senior management of financial institutions, including hedge funds. Although incentive compensation reform was part of Dodd-Frank, these provisions have not yet been finalized. It is possible they might not be diminished and could even be strengthened by future legislation or rulemaking. Similarly, he has said that there is too much familiarity between senior management and independent board members, resulting in senior management having too much influence on board decisions. This implies the potential for emphasis and action regarding strengthening corporate governance.
Consumer Financial Protection Bureau
- Mr. Trump has expressed a desire to abolish the CFPB though it is more likely the authority of the CFPB will be scaled back, subjected to tighter control by Congress, and placed under new leadership.
- CFPB jurisdictional coverage over banks and nonbanks, as well as supervisory expectations may not change quickly if at all.
- The consumer protection role of the CFPB, including protection of small businesses, would seem to be consistent with Mr. Trump’s position on promoting the fairness in the financial markets and supporting the “regular American,” making it unlikely that the mandate of the Bureau would be eliminated entirely.
- Republicans in Congress have proposed legislation multiple times to shift the leadership of the CFPB from a single director to a bipartisan five-person commission and to subject the Bureau to the appropriations process. These same provisions have also been included in the H.R. 5983.
Regulatory Agency Leadership
- Mr. Trump will likely appoint new federal financial services regulatory agency heads at the end of their current terms or sooner for those that offer resignation. New reports suggest that:
– Federal Reserve Chair Janet Yellen, is expected to remain until the end of her term (February 2018). There is also an outstanding Board position for “Vice Chair for Supervision” created by the Dodd-Frank Act that could now be filed by the new administration.
– SEC Chair White has announced she will step down at the end of President Obama’s term (January 2017) leaving the Chair position and two commissioner positions to fill.
– A new Chair of the CFTC will be announced.
– There is a widely held view that Mr. Trump will seek a Republican appointee to lead the CFPB. A recent court decision (barring a decision from any appeal) gave the President the ability to replace the CFPB Director at will.
DOL Fiduciary Rule
- The DOL Fiduciary Rule became effective in June 2016 and the first phase of compliance is scheduled for April 2017. The rule has been the subject of much controversy, including Republican opposition, a vote to rescind (passed by both houses of Congress), and multiple lawsuits. Many industry participants have speculated that the compliance date for the rule will be pushed back or that it will be eliminated through legislation.
- The SEC is working on a similar rule and some have speculated the DOL rule may be held back until the DOL and SEC can work to create a joint rulemaking.
- The premise of the DOL rule is consumer protection, which is consistent with Mr. Trump’s stated position during the campaign to make the financial system fair for all.
- Any changes to the DOL Fiduciary Rule will likely have a significant impact on the Insurance Industry as the rule impacts retail sales of retirement investment products, which commonly include annuity products traditionally sold by the insurance sector.
- Any changes to the FSOC and SIFI designations will likely affect large insurance companies – the two currently designated nonbank SIFIs are insurance companies.
Although the election results will bring changes to many aspects of financial services regulation, the tenets of risk governance and conduct and culture are likely to remain entrenched in the expectations of regulators and consumers across the financial services industry. Regardless of the regulatory environment, indications suggest financial institutions of all sizes should, in many respects, “stay the course,” recognizing that for now, the scope of anticipated change is speculative and, when known, inclusive of repeals or revisions, will take time to enact, implement, and operationalize. In particular, financial institutions should continue efforts to: improve operational effectiveness and efficiency; strengthen oversight, compliance, and risk management; maintain a customer-oriented focus; and meet the growing challenge from innovators and new market entrants. There are many drivers of change impacting the financial services industry and these issues will remain relevant independent of, and throughout, any regulatory changes currently being contemplated.