My research and writing on the Dodd-Frank Wall Street Reform and Consumer Protection Act has so far focused more on specific compliance components, such as “say on pay” and clawback policies. OpenPages Vice President Gordon Burnes regularly huddles with chief risk officers and CFOs at client companies in the financial services sector to keep tabs on the risks that concern them. While Dodd-Frank applies to all companies, firms in the financial services sector have been closely watching the new regulation ever since its inception. Here's what Burnes had to say about the new law's likely impact -- from a big-picture perspective as well as a financial services standpoint.
Eric Krell: Who gains and who loses in Dodd-Frank?
Gordon Burnes: You might argue that it is a win for those that have advocated greater regulation over the financial services sector (e.g., consumers and businesses) and a loss for those financial services companies that have resisted that greater regulatory oversight. Indeed, the creation of the Consumer Financial Protection Bureau as part of the Federal Reserve will be a powerful advocate for consumers. However, it's not that simple. First, there's much rulemaking to ensue from the passage of the legislation, which means that the financial services industry will be able help shape and influence any future regulation that results from the bill. Second, one of the key aspects of banking regulation is capital. Dodd-Frank was careful not to proscribe anything that would contravene the Basel III process, and that process appears to be favorable to banks; the recent capital requirements resulting from the Basel III process sent bank stocks up, not down. Third, some have argued that greater regulation will bring stability to the financial services sector, which in turn will spur investment as businesses get more confident in the economic outlook. And, of course, this investment will benefit the banks themselves. So, in some ways, it's too soon to tell who wins and who loses: this may be a win-win.
Eric Krell: Which components of the Dodd-Frank legislation will have a direct impact on risk and compliance managers and programs?
Gordon Burnes: It's important to understand that the fundamental purpose of the Dodd-Frank legislation is to make the financial system more stable. Prior regulatory regimes, like Basel II in Europe, some of which was adopted here in the U.S., really focused on the stability of institutions; this regulatory regime is focused on the system. As such, there are few proscriptive requirements, like those outlined in like Sarbanes-Oxley, for risk and compliance managers. However, the systemic risk oversight council will rely on data from the newly created Office of Financial Research. This office sits in the Fed and will be responsible for collecting data from institutions and government agencies for the council to use to make their judgment on the relative stability of the financial system. Thus, we can expect existing government regulators to be much more thorough and exacting on their requirements for risk reporting from the covered financial services institutions. Risk and compliance managers would do well to put in place a programmatic approach to risk and compliance reporting, an approach that will survive the intense regulatory scrutiny that is sure to follow.
Eric Krell: When might financial services companies expect to see new rules, regulations ... and what are some likely areas that could be addressed?
Gordon Burnes: We will see rulemaking from Dodd-Frank roll out over the three to five years. The recent appointment of Elizabeth Warren as special advisor for the Consumer Financial Protection Bureau suggests that this will be an area of focus for the Obama administration. Also, you've seen some companies make the decision to drop their proprietary trading in the wake of the bill. Compensation is another hot spot, and if the UK is any guide to what might happen here, we could see “at risk” compensation drop as a portion of the overall package. Finally, derivatives is another hot area; although it will take some time for the CFTC and SEC to coordinate on the ultimate rules. ###