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The possible fallout of repealing Dodd-Frank

It's been ominously described as 'a recipe for a huge disaster' and a ' long, hard slog' – so what lies ahead if the Dodd-Frank Act is repealed?

Following the executive order that put in motion the wheels that could eventually lead to a reduction of the scope of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, business and financial markets have had time to digest what this could mean in practice.

'A long, hard slog'

In a podcast published last Friday, Wharton's Peter Conti-Brown and University of Michigan Law School's Michael Barr discuss some of the likely consequences of repealing or dismantling some of the Dodd-Frank Act. First of all, it's important to note that the regulation is highly complex. It actually consists of 16 separate acts contained within one statute. It took years to go through the necessary regulatory and legislative processes to enact the act, and it will take a long time to undo certain aspects of the regulation. Professor Barr described Friday's order as simply “the opening set of salvos in a long-running war”, which he said will be “a long, hard slog” for everybody involved.

It's also important to note that, as everyone has realised by now, the act enforces a strong level of protection for consumers accessing financial services, from pensions to mortgages to investments. Weakening this consumer protection should prove to be highly unpopular with many of Trump's core supporters. The government is likely to attempt to repeal Dodd-Frank by means of a failed 2016 bill, called the Financial Choice Act, which Republican Congressman Jeb Hensarling has reintroduced.

'Recipe for a huge disaster'

Some of the ramifications of the Financial Choice Act and the repeal of Dodd-Frank include:

  • As mentioned above, the Financial Choice Act would weaken consumer protection. Professor Barr describes it as “a recipe for a huge disaster”, adding: “[Dodd-Frank] put in place real guardrails against re-creating the kind of financial crisis we saw in 2008. It is inexcusable that the administration has targeted the most vulnerable people in our society to be the ones that bear the brunt of their ideological push.”
  • Barr credits Dodd-Frank and its requirements for higher capital and safeguards for investors and consumers with the current good health of the US financial system. He refutes that the act has hindered the growth of the banking industry or the economy.
  • The Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Act, has already returned $11.7 billion to consumers “who were taken advantage of” in the financial system, according to Professor Barr. The Financial Choice Act would put the CFPB at risk.
  • Dodd-Frank also implemented the process to wind down big firms that get into financial trouble without taxpayer-funded bailouts. This process could be disbanded.
  • It also requires oil companies to report their payments to foreign governments – a requirement that might be waived under the Financial Choice Act.
  • Under Dodd-Frank, the SEC requires companies to disclose the gap between CEO salaries and the median salary of their employees. This would stop under the Financial Choice Act.
  • While Barr and Conti-Brown welcome some change to Dodd-Frank to alleviate some of the onerous reporting requirements for small community banks, they argue that simplifying the rules for these banks does not mean repealing large sections of the act that protect consumers and strengthen the financial system. Barr said: “It has everything to do with unleashing parts of the financial sector that brought the US to its knees in 2008.”

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Control & Compliance in Operations

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