Biden’s Inauguration Heralds a New Era in Financial Regulation

In the aftermath of the global financial crisis in 2008-2009, the U.S. government tightened regulations under former President Obama, making them more stringent in an effort to stabilize the financial system – most notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which established the Consumer Financial Protection Bureau and placed stringent rules on banks that were “too big to fail” following the subprime mortgage crisis, among other sweeping changes to bolster the U.S. financial system.

These Obama-era policies came under fire, however, at the start of the Trump administration in 2017. There was a constant push to roll back a number of rules and regulations, and former President Trump revoked key regulations, some of which are outlined below. As the U.S. enters the early days of the Biden administration, investors should prepare for an end to Trump’s laissez-faire approach to financial regulation, and financial service institutions ought to consider new ways to manage the cumbersome and costly processes of compliance, particularly as the economy remains embattled by the global pandemic.

Trump’s Regulatory Rollback

Relatively early in his term, former President Trump attempted to relax the rules around the Dodd-Frank Act, weakening banking regulations. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 removed mandatory oversight measures such as quarterly reporting that were in place to ensure banks engage in transparent and safe lending, investing and leverage activities, which arguably put investors at greater risk.

President Trump also made the controversial decision to privatize Fannie Mae and Freddie Mac. For many years, the profits of these giant government-sponsored enterprises (GSEs) were transferred to the federal government. The Trump administration worked to release them from government conservatorship and build private capital for them, a goal the administration had hoped to achieve before its exit from the White House.

The Securities and Exchange Commission (SEC) further changed regulatory measures by replacing the Fiduciary Rule with the Regulation Best Interest (Reg BI) policy. This revoked the rule of the Department of Labor that forced financial advisors and brokers handling retirement and 401(k) accounts to act as “fiduciaries.”

Finally, President Trump fulfilled a campaign promise to withdraw from the Paris Agreement. Known for his “America First” policy, he decided that its terms were not favorable to U.S. taxpayers, corporations or the national economy.

Blue Wave of Change

While former President Trump can be regarded as a populist whose intention was to deregulate policies to support and favor business, President Biden is an institutionalist and a centrist, focused on re-regulating reforms and policies. Under the Biden administration, investors will see a slightly tougher regulatory environment aimed at combating economic inequality and social injustice.

1. Stricter Enforcement to Come

Janet Yellen, the new Treasury Secretary, believes tighter regulations help the financial system to be better prepared for an economic downturn. She argues that the Dodd-Frank Act has made the banking system safer, as banks are required to hold higher levels of capital and promote regulation, and large banks are required to conduct annual stress tests to ensure they can withstand a financial crisis.

For this reason, the Biden administration will likely usher in an era of stricter enforcement of the Dodd-Frank Act. Banks and financial institutions will see more scrutiny of wrongdoing and rewritten rules around payday lending, ensuring institutions underwrite loans only to consumers who can repay them. The administration will strategically focus on regulations impacting minority consumers, such as fair housing, fair lending and overdraft fees.

2. Greater Focus on ESG

President Biden will focus on environmental, social and governance (ESG) policy, as there is currently a lack of consistency, standardization and regulation in this area. The SEC is likely to implement mandatory ESG disclosure standards and more aggressively enforce environmental regulations for all companies. It will look at ESG disclosures such as climate and risk disclosures, corporate governance, worker pay, worker treatment, diversity and health care policies. To bolster these goals, President Biden has chosen John Kerry, who had signed the Paris Climate Agreement, as Special Presidential Envoy for Climate. The new administration will rejoin the agreement and build global climate leadership with Kerry.

3. Growing the Public Pool

The SEC has been aggressive in expanding the pool of private markets in recent years, making it easier to raise money. Conversely, the Democrats will aim to pull companies that have remained private for years into the public markets. They believe that once a company reaches a certain size, it should be a public company and should not go through endless rounds of fundraising to stay private.

4. Enforcing Reg BI

In an effort to build protections for consumers and level economic inequality, President Biden is expected to enforce Reg BI and revisit its standard of conduct. Democrats believe that when workers are saving for retirement, the financial advisors who advise them are legally obligated to put their clients’ interests first, rather than prioritizing their own. The new administration would also like to roll back the shareholder proposal rule, as it is very difficult for a small investor to submit or resubmit a proposal for inclusion in company proxy material.

5. Regulating Cryptocurrency

The financial team in the Biden administration says cryptocurrencies, including bitcoin, also need regulations to grow and protect investors from market manipulation. The view is to consider initial coin offerings as securities and place them under the regulatory purview of the Commodity Futures Trading Commission (CFTC) and SEC.

6. Keeping GSEs Under Government Control

When it comes to Fannie Mae and Freddie Mac, there will likely be a reversal of the plan to privatize these two entities. The new administration believes releasing GSEs from government control will result in higher mortgage rates for home buyers. The conservatorship has helped smaller lenders survive along with large competitors, and the mortgage-backed securities (MBS) market has been very liquid, favoring borrowers. President Biden’s plans face an obstacle, however, if he is unable to replace Mark Calabria, the Trump-appointed director of the Federal Housing Finance Agency (FHFA), the regulator that oversees GSEs.

Financial Service Providers Prepare to Navigate Regulatory Concerns

Although President Biden has said his tenure is not a third Obama term, he plans to move the administration from Trump’s “principles-based” approach to a “rules-based” environment. The agenda is to ensure consumers have a voice and the system is one in which everyone abides by the rules. With tighter regulations and President Biden’s vast experience in international affairs, his tenure may prove promising for U.S. and world economics.

While President Biden’s plans may strengthen the financial system, companies should prepare for increased regulatory burdens. Many of the new and reinstated regulations will likely lead to an increase in due diligence and regulatory reporting. The higher workload and additional costs for compliance departments may motivate financial service providers to outsource this work to third-party experts who can streamline the processes. Knowledge process outsourcing (KPO) providers, for instance, often serve as an extension of onshore teams in this scenario, eliminating data silos and reducing costs. Investors grappling with the market impact of the Biden administration and the lasting effects of the pandemic should look to bolster their compliance infrastructure ahead of this imminent wave of regulation.