In an interview with the Economist, published on May 11th, President Donald Trump announced ‘a very massive overhaul’ of Dodd-Frank, the act signed into federal law by his predecessor President Barack Obama in 2010. Dodd-Frank promised to prevent another global financial crisis through regulations and government control, but under President Trump the US Financial Services Committee has approved the CHOICE Act for consideration by the full House of Representatives. The CHOICE Act, or the Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, sets out to overhaul the financial regulation put in place by Dodd-Frank and transform it from a uniformly applied set of reforms to one that is more nuanced with the aim of promoting economic growth. Republicans feel that Dodd-Frank rewards the Federal Reserve, who they believe was most responsible for the global financial crisis, with too much power, while imposing heavy requirements on private equity advisors who did not contribute to the crisis.
The Dodd-Frank regulations have been criticised for the paperwork and costs associated with complying with their requirements. It’s not just the financial institutions who struggle to keep up with compliance; out of 12 000 investment advisors overseen by the SEC, only 11% have actually been examined. Research by the American Action Forum found that compliance costs have reached $36 billion, and that 73 million hours of paperwork have been spent – that is the equivalent of almost 37 000 employees working full-time for one year. A survey of small banks undertaken by Mercatus found that 83% of small banks had experienced an annual increase in compliance costs of more than 5% since Dodd-Frank (see chart below). As these costs are inevitably passed onto the consumer, the CHOICE Act aims to prevent this.
Included within the Financial CHOICE Act are measures that reduce regulations on certain financial services companies. For example, community financial institutions will be relieved from certain compliance obligations that would deplete their time and money – enabling them to provide the personalised service that is a significant part of their relationship-based lending model. This will allow more consumers better access to credit, in the hope that this will encourage spending and boost the economy. The CHOICE Act isn’t merely a case for deregulation, however: set out in the aims, are guarantees for consumer protection against fraud and deception, as well as the management of systemic risk.
This action is supported by American financial services lobbying and advocacy organisation the Financial Services Roundtable (FSR), which argues that taxpayers and consumers can still be protected, even with the changes suggested by the CHOICE Act. They were keen to state, however, that the regulation and oversight of investment advisors ‘should be the primary responsibility of the Securities and Exchange Commission.’
One of the ways in which the Financial CHOICE Act plans to reduce the burden of regulation on institutions that it deems highly-rated and well-managed is by minimising the data collection demands that are currently in force. With call reporting potentially not necessary to the same level and redundancy, financial services companies may consider altering the requirements of their phone system.
However, record keeping and reporting requirements will not be completely waived and call recording will certainly remain essential to the working practice of financial institutions. Compliance with these measures will be a way for institutions to prove they are highly-rated and well-managed. For financial services companies to be granted a reprieve from exhaustive regulations, they must meet the SEC halfway.