The devil is usually in the detail. The detail that matters with America’s newly passed financial reform legislation will be the rules and regs yet to be written and the appointments made to oversee the writing and enforcement of those rules and regs. Congress has passed a broad set of instructions to regulators but left, let us say, 75% of the work still to be done over the next four years. That leaves plenty more time and scope for the financial services industry to lobby to water down the provisions of the Restoring American Financial Stability (RAFS) Act still further.
As it is, the act does little to reduce systematic risk. The work being done on capital requirements, liquidity and leverage limits by the the G20’s Financial Stability Board to create global standards for systemically important financial institutions is likely to prove to be of more lasting significance in that regard.
Legislate first, regulate second is not novel in the U.S. Sarbanes-Oxley, the corporate governance legislation hastily enacted by Congress in 2002 in the wake of the WorldCom and Enron scandals, was similarly broad-brush. That its subsequent rule making was in line with the strict spirit of the legislation owed much to the presence of an activist chairman at the Securities and Exchange Commission in William Donaldson.
RAFS will involve many more regulatory agencies than just the SEC, offering not just a less natively uniform regulatory landscape but all the more opportunity for the financial services industry to divide and rule. Banks have already weakened in the act the impact of the proposed Volker Rule to limit their proprietary trading. Their next step will be to expand even further through rule making the types of proprietary trading they are allowed to undertake. The exemption for proprietary trading on behalf of customers gives them a massive loophole to start from. Similarly, banks will be lobbying to keep a growing range of bespoke derivatives trading off-exchange, while making sure new rules for trading standardized contracts on-exchanges aren’t too burdensome.
One area where there will be less scope for post-legislation tinkering is the new Consumer Financial Protection Bureau, which has been uncharacteristically tightly and narrowly drafted by the standards of the rest of the RAFS Act. Who gets appointed as its head and their skill in negotiating the Washington bureaucracy will be key. But even before then, as the president gets to nominate the candidate but the Senate has to confirm him or her, the tenor of consumer protection within financial services could turn on November’s mid-term elections as much as anything.