By Tina Irgang
President Donald Trump signed two orders Feb. 3 that pave the way for rolling back the Dodd-Frank Wall Street Reform and Consumer Protection Act and the so-called fiduciary rule, a regulation that governs investment advice. How likely is a repeal of either, and how would it impact businesses?
The Dodd-Frank Act was passed in 2010 as a reaction to the 2008 financial crisis. It was “intended to decrease various risks in the U.S. financial system,” according to Investopedia. “The act established a number of new government agencies tasked with overseeing various components of the act, and by extension various aspects of the banking system.”
Perhaps the best-known component of the law is the creation of the Consumer Financial Protection Bureau (CFPB), a new federal agency tasked with preventing predatory lending practices.
Critics of Dodd-Frank contend that the law has led to consolidation in the banking system, making it harder for businesses to receive credit, which in turn hampers economic growth.
Indeed, the Mercatus Center at George Mason University has found that in the first four years after Dodd-Frank’s passage, the U.S. lost 14 percent of its small banks. “Regulatory expenses absorb a larger percentage of small banks’ budgets than of their larger counterparts’ budgets,” the researchers note, so the law seems to have affected small banks disproportionately.
This is problematic for small businesses in particular, because approximately half of small-business loans are made by community banks, according to researchers at the Mossavar-Rahmani Center for Business and Government at Harvard’s John F. Kennedy School of Government.
Dodd-Frank: Benefits and odds of repeal
However, there are portions of Dodd-Frank that are intended to benefit small businesses. For example, the CFPB was designed to “shield small businesses from abusive lending practices, deceptive credit arrangements and fraudulent mortgage schemes,” notes The Business Monthly.
Indeed, opponents of a Dodd-Frank repeal worry that it would lead to a resurgence of the predatory lending that precipitated the financial crisis, says U.S. News & World Report.
In any case, an outright repeal will be difficult to accomplish any time soon, given the fact that many of Dodd-Frank’s provisions have already been implemented, U.S. News adds.
However, the Republican-controlled Congress could choose to weaken individual provisions of the law, such as the Volcker Rule. That rule “bars banks from making certain speculative investments that could boost profits, but not benefit their customers,” notes NPR.
Many Republicans have also been vocal opponents of the CFPB. However, NPR adds, Congress is unlikely to dismantle the agency outright, given its recent role in punishing Wells Fargo for widely publicized illegal practices that included opening accounts for customers without their consent.
On balance, a repeal or partial dismantling of Dodd-Frank has the potential to free up resources banks are now using on compliance. It remains to be seen whether these resources will be channeled into more lending, and whether the trend of consolidation among small banks can be reversed.
The fiduciary rule and the investor’s interest
Let’s get back to the other regulation President Trump has vowed to undo: the so-called fiduciary rule. Unlike Dodd-Frank, the rule does not yet have the force of law. At this point, it is simply a proposed rule that had been published by the Obama administration.
Trump’s memorandum on the rule “directs the Labor Department to review whether the rule may ‘adversely affect’ investors’ ability to access financial advice — and if it does, it authorizes the agency to rescind and revise the rule,” reports The New York Times.
In other words, because the rule is merely a proposal at this point, the Trump administration would find it relatively easy to prevent it from taking effect.
Is such an outcome desirable for businesses? First, let’s look at what the rule entails. In basic terms, it would require financial advisors who work with clients on retirement accounts to hold themselves to the fiduciary standard. That means they would be required to put the client’s interest above all else in recommending investments, says Time.
This is important because “investment professionals who are not bound to a fiduciary standard have been known to recommend investment products to their clients because they offer the highest commissions, and not because the products were actually in their clients’ best interest,” as USA Today explains. Registered investment advisors currently are required to abide by the fiduciary standard, but many brokers are not.
On the other hand, there is concern among some in the financial industry that, similar to Dodd-Frank, the cost of compliance would unfairly impact smaller investment advisors and put them out of business, potentially limiting choices for those who seek advice on retirement-account options, the article goes on to say.
In the end, whether or not the proposed rule is withdrawn, it seems that “most big banks with brokerage arms are ready to comply with the fiduciary rule as planned,” says Forbes.
For businesses who rely on their strategic partners to give them the best advice possible, this, at least, can only be good news.
Tina Irgang is SmartCEO’s managing editor. Contact her at email@example.com.