The regulatory environment is always characterized by a certain amount of uncertainty.
What will regulators think about this new product, service, or technology?
Will the government introduce any new laws or regulations that affect our business, or maybe change existing ones?
How will any new or updated requirements be implemented?
Are we really going to have meet the new/different requirements, or will it all get postponed or changed later?
What will examiners want to dig into at the next exam?
If examiners find problems, what will the consequences be?
These are timeless compliance questions. You’re always looking to the future to predict the best course of action today – or should be anyway – whether it’s introducing or tweaking products and services, adding or reducing headcount, investing in new systems, revising processes, or just prepping for an exam.
That gets more challenging when uncertainty is higher, when there are likely to be real changes in how the government approaches the banking sector or businesses more broadly. Big changes can happen in response to an industry crisis (example: the Dodd-Frank Act following the 2008 financial crisis) or national security disaster (example: enhancement of anti-money laundering rules following 9/11). Bad behavior by a handful of individuals can even usher in new rules or increased oversight (example: creation of the Sarbanes-Oxley Act following the Enron scandal).
Those are examples where events prompted tighter regulation, but occasionally regulatory expectations also relax. Think about the softer stance the agencies adopted, at least on some fronts, when COVID scrambled everything from employee office attendance to customer account activity and ushered in a new government-backed lending program (the Paycheck Protection Program) with very few guardrails.
The regulatory environment is currently poised to undergo a sea change, this time related to a new presidential administration. The rotation of politicians and political agendas often pushes the regulatory pendulum one way or another, generally in smaller degrees. But this time looks different.
While the Joe Biden administration pursued an activist stance on consumer protection issues, including the elimination of overdraft fees, things are likely to change during Donald Trump’s second term and it won’t be a mere reversion back to the pre-Biden status quo. Trump’s proposed changes amount to a re-formularization of how the executive branch regulates private industry, which includes dismantling entire agencies, limiting the introduction of new regulations, and radically reducing the financial and personnel resources agencies have at their disposal for enforcement.
Those kind of changes far exceed what Trump accomplished in his first term, such as reducing the amount of data certain banks had to collect under the Home Mortgage Protection Act, and raise even more significant questions than what a pro-cryptocurrency president will mean for regulation of digital assets. Assuming Trump and the new Department of Government Efficiency realize the vision they’ve laid out, it’s hard to comprehend what government regulation will look like in the future.
Trump is already facing legal pushback, which could styme parts of his regulatory agenda. The Constitution requires that the President take care to faithfully execute laws passed by Congress. Some of Trump’s early actions arguably violate that duty, such as ordering the Consumer Financial Protection Bureau (CFPB), which was created and empowered by the Dodd-Frank Act to enforce federal consumer financial protection laws, to stop all work. However, given that many active federal judges were appointed by Trump, legal claims against his current actions may fall flat. Also don’t discount the possibility that a Republican-controlled Congress will choose to revise some of the laws the President looks unlikely to enforce.
So at a time of heightened uncertainty, what is a bank to do?
Don’t gamble on compliance. This one goes without saying. Betting on expectations that existing requirements will go away, or that new ones won’t be introduced, could end in disaster. With everything still in flux, it’s time to take stock. Enrich yourself in the details of current compliance programs, processes, personnel, systems and risks so you can make better decisions once changes in the regulatory environment actually crystalize.
Stay focused on solid principles. At the core, most banking regulation comes down to prudent risk management and treating customers fairly. Regardless of regulatory expectations, these things should always be the foundation of your business. Failure to do so can end in major losses and reputational or legal damage, even if it doesn’t trigger penalties from regulators.
If some of your bank’s compliance activities are no longer examined or required, it’s still worthwhile to retain those that help you identify and mitigate true safety and soundness problems and consumer harm issues. Also think about how you will apply those same fundamental principles before deploying any new product, services, or vendor arrangements that might look more attractive in a more permissive regulatory environment.
Don’t forget about your state regulators. Even if enforcement of federal laws and regulations is eroded, that doesn’t necessarily change things at the state level. Some state governments may even adopt or expand state banking laws and enforcement efforts in response to a more lax federal position. It would be unsurprising to see states already known for their aggressive approach to financial sector regulation to expand their reach (i.e., New York, California), while other states do so to a greater or lesser extent.
