President Donald Trump issued two executive orders last week geared at scaling back or replacing financial regulations that he deems a burden to commerce and growth.
The move signals a big win for Wall Street — whose elite are up for top spots in Trump’s cabinet — and comes at the expense of the working class. It exposes investors and the average American to a less-regulated landscape reminiscent of the pre-financial crisis era — and the risks that go along with it.
The two regulations coming under attack are the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the fiduciary rule.
Dodd-Frank was created in response to the 2008 financial crisis and consists of a lengthy set of regulations designed to limit the risks taken by financial institutions and protect consumers in an effort to limit future crises and bailouts.
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The fiduciary rule, on the other hand, is still in its infancy. The rule requires advisors and brokers to act in the best interests of their clients — a novel idea — and more or less prohibits them from selling self-enriching, higher-fee funds to clients with retirement accounts if they aren’t in the client’s best interest. But it doesn’t go into effect until April 2017, which means Trump has a significant amount of say over its implementation.
Cutting the fiduciary rule certainly wouldn’t be doing Americans saving for retirement any favors, but its long-term effect on the market is unclear. Scrapping Dodd-Frank, on the other hand, could, over time, have severe implications for the stock market and puts the risk of another recession back on the table.
Dodd-Frank is a broad piece of legislation, but there are three key elements:
The Volcker Rule:
A follow up to the Glass-Steagall rule, the Volcker Rule prohibits banks from using or owning hedge funds for their own profit and from using their depositors’ funds to trade on their own accounts. While the Trump administration’s EO can’t put a definite end to the rule, it can ease up on its enforcement, ultimately putting depositors at risk.
“They get to take all the risk with FDIC-insured money, and then, as we all learned in ’08, if they make a mistake you and I have to cover the losses. That’s a pretty good business model if you think about it, right?” said Julian Rubenstein, CEO and president of American Asset Management.
The Consumer Financial Protection Bureau:
The Consumer Financial Protection Bureau is a consumer protection watchdog established through Dodd-Frank to protect the interest of consumers, primarily against predatory schemes. It regulates credit fees, including credit, debit, mortgage underwriting and bank fee, amongst others.
Weakening the Bureau by swapping out its current director with a more apathetic replacement or cutting off its funding could have disastrous indirect consequences, one of which could be a rise in unaffordable mortgages being written that consumers don’t have the ability to pay — the very thing that kickstarted the ’08 financial crisis.
The Financial Stability Oversight Council:
The Financial Stability Oversight Council was put into place under Dodd-Frank to review the systematically important financial institutions.
According to Nilesh Vaidya, Senior Vice President and head of banking and capital markets for Capgemini Financial Services, the elimination of the Council would spur a change in market structure and provide financial institutions with much more leverage than they currently possess. “In some cases that would increase lending, in some cases it would increase more proprietary trading. Other instruments which have become a little less prevalent, like CDOs, would come back into the picture. That would be much more impactful to the market than even the Consumer Financial Protection Bureau,” Vaidya said.
Additionally, Dodd-Frank helps maintain a level of transparency in the financial industry. One of the causes of the ’08 recession was that the underlying assets of derivatives were hidden. Dodd-Frank noow requires hedge funds to register with the SEC and provide data about their trades and portfolios so the SEC can assess overall market risk.
Trump’s cabinet members claim that banks no longer need the Dodd-Frank rules and supervision, and that they have enough capital to withstand any future crisis. But many financial leaders and companies support the law, and say it has helped create a banking system with more and better capital.
“I’ve heard there’s regulatory compliance burden and it has increased, there’s no doubt about it. But one reason why they are there is because banks are involved with a variety of customers and while I’d like to think that everybody is just an upstanding law-abiding person, there’s a lot of nefarious activity and potentially terrorist activity,” said Charles Evans, President of Chicago Fed.
Section 1502, which deals with conflict mineral monitoring and reporting, will also be targeted for amendments, reform or even repeal. But advisory and responsible raw materials supply chain audit groups such as RCS Global believe that while some industries will inevitably disengage from Dodd-Frank level compliance, the majority have and will continue to meet and go beyond Dodd-Frank 1502 stipulations.
“In some ways section 1502 has achieved much by launching a global debate on where we get our raw materials from. It has spurred other investigations into sourcing, and as a result, whole industries have moved beyond the limits of the legislation,” said RCS Global director Harrison Mitchell.
“Persistent advocacy pressure and the opportunity for brands to differentiate their products by sourcing responsibly is a clear and discernable trend, proven by the latest pressure on the cobalt sector, a mineral which is not subject to DF1502 requirements. Industries, not least the consumer electronics sector, have also started to raise compliance standards even further through voluntary enhanced due diligence programs which are being industry standard.”
Dr. Nicholas Garrett added, “Any weakening of Dodd-Frank 1502 will not affect the general direction of travel which is going towards more transparency, responsibility and accountability throughout the minerals supply chain.”