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Impact Of The US Election On The Finance Industry « Back
Matt Atkins, November 2012
Governmental elections often result in some level of economic insecurity and election results, with their influence on legislation and regulation, can significantly impact the market. Arguably, the coming US presidential election has generated a higher level of financial uncertainty than is the norm, surrounded as it is by an especially contentious set of issues. Against a backdrop of harsh electoral conditions including high unemployment, low growth and public pessimism about the economy, President Barack Obama remains in a tight race with Republican candidate Mitt Romney. With the immediate future of the finance industry in the hands of the victor, what forecasts can be made for future legislative and regulatory change, and what steps can institutions and organisations take to prepare for a shift in government?

Regulatory overhaul

Entering office at the height of the global financial crisis, Mr Obama moved quickly to enact major regulatory and legislative change, signing into law a set of reforms designed to “empower consumers and investors, to bring the shadowy deals that caused this crisis into the light of day, and to put a stop to taxpayer bailouts once and for all”. The most significant regulatory changes revolved around the enactment of the Dodd-Frank financial reform legislation in 2010. The 848-page Dodd-Frank Act brought the most momentous changes to financial regulation in the US since the regulatory reform that followed the Great Depression, requiring banks to increase their capital, enacting mortgage reform, and providing new governance guidelines for credit rating agencies, amongst other things.

The Act gave greater oversight of Wall Street to various federal agencies. The creation of the Consumer Financial Protection Bureau (CFPB) established a federal rulemaking, supervisory, and enforcement agency for consumer finance, with the aim of protecting homeowners from predatory mortgage loans and requiring greater transparency of lenders to students who borrow money to continue in higher education. Furthermore, the Securities Exchange Commission (SEC) has, under the Obama Administration, become a much more tenacious organisation. Though there have been suggestions that increased regulation under the current SEC regime has led to inefficiency and the potential for market dislocations, the improvements in transparency and disclosure have benefitted investors who have found it easier to analyse and subsequently invest in corporations.

The response to the Dodd-Frank Act was varied. The legislation drew criticism for being too draconian and for being too lenient. The scope of the act raised fears that its implementation was unfeasible, and also that its measures would strangle the US economy. The worst case scenarios have not yet come true however, and the financial sector has largely accepted compliance as a fact of life. “The financial agencies, with the encouragement of the Obama Administration, are moving forward with their regulatory efforts, although many statutory deadlines for the adoption of regulations have slipped due in large part to the large number of regulatory actions that are required under Dodd-Frank,” says Charles Horn, a partner at Morrison & Foerster LLP. “In addition, the financial services industry has reacted with substantial concerns over the potential costs and burdens of these regulatory efforts and the potential business-dampening impact of these actions, and many of the regulations to implement the major portions of Dodd-Frank remain in limbo.”

Lack of clarity is a major issue for many actors in the industry, according to Peter S. Morgan, a partner at SNR Denton LLP. “The chief concern among many participants in the financial industry concerning Dodd-Frank is its lack of specificity and the failure of the applicable federal agencies to promulgate rules and regulations that would provide needed certainty on the meaning of several of Dodd-Frank’s requirements,” he explains.

The financial industry’s concerns are broadly shared by the Republican Party. The Volcker Rule, for instance, which restricts US banks from making particular speculative investments that do not benefit their customers, has been a specific target of the party, which opposed it near-unanimously in 2010. At the political level, the divide in opinion is an ideological one. Mr Romney, along with many in his party, believes that the Dodd-Frank Act provides an example of an overreaching and overbearing federal government, and that, rather than tackling the root causes of the financial crisis, hurts small banks and businesses that lack the capability to deal with its costs and complexities. Mr Romney has pledged, if elected, to repeal the law, or at the very least certain aspects of it.

Despite enacting legislation perceived as an attack on the financial industry, Mr Obama maintains that he is neither ‘anti-banker’ nor ‘anti-Wall Street’. On signing the Dodd-Frank Act, he acknowledged the central role of the industry in fostering growth, competitiveness and prosperity. “There are a lot of banks that understand and fulfil this vital role, and there are a whole lot of bankers who want to do right – and do right – by their customers,” he said. “This reform will help foster innovation, not hamper it.”

Repeal and restructure

Should Mr Romney win the keys to the White House in November, he has vowed to repeal Dodd-Frank, instituting a “streamlined, modern regulatory framework”. The intended result would be a revamped Dodd-Frank that preserves some level of protection for investors and consumers, while accommodating some of the most profitable and riskiest activities. Such an overhaul will “provide a more workable degree of regulation that protects the economy through more certain and defined measures while not suffocating economic growth,” says Mr Morgan. “Romney has also pledged to reform the Internal Revenue Code to lower overall corporate tax rates while removing certain deductions and loopholes in the IRC. If Romney’s analysis is correct, the regulatory certainty and less complex corporate tax scheme will result in economic growth.”
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