The United States is poised to usher in an era of decreased regulation of financial institutions while the trend in the United Kingdom is to maintain relatively robust regulation of the financial services sector in line with developments since the global financial crisis. The parameters and potential impacts of these differing regulatory regimes remain unclear, but will present challenges to institutions that operate internationally. Though a great deal of unpredictability continues to permeate these environments, institutions in both the US and the UK should keep a close watch on and seek counsel regarding how their cross-border activities may be impacted.
The push to deregulate in the US
The Trump administration has signaled a shift in the US regulatory landscape to one of decreased regulation. The administration believes that robust regulation, including that implemented in response to the regulatory laxness that contributed to the financial crisis of 2008, has negatively impacted the ability of financial institutions to compete domestically as well as globally. While President Trump has enacted certain Executive Orders outlining a path of decreased regulation, it is unclear how these Executive Orders, which lack the force of law, will impact the functioning of financial institutions.
In addition, the President recently issued a series of Presidential Memoranda targeting Dodd-Frank by requiring the Treasury Secretary to assess and report by mid-October on whether certain provisions of Dodd-Frank comport with the administration’s drive to ensure that regulation is not inhibiting the proper functioning of financial institutions. Even these directives, along with the recent passage by the House of Representatives of the Financial CHOICE Act of 2017, designed to curtail the powers that regulatory agencies enjoyed under Dodd-Frank, do not allow for an easy assessment of whether the subject rules and regulations will be changed or repealed.
Further complicating matters, the drive towards deregulation is not limited only to laws, such as Dodd-Frank, that explicitly govern the conduct of financial institutions. Rather, the Trump administration appears to be seeking to curtail the power of federal agencies to enforce and enact existing regulations and laws aimed at financial institutions. For instance, the administration’s proposed budget eliminates the Reserve Fund, a key fund that the Securities and Exchange Commission (SEC) has characterized as necessary for it to actively monitor institutions and ensure compliance with the SEC’s regulatory regime. In addition to its existing hiring freeze and the SEC’s decreased use of contractors to aid enforcement, it appears that the SEC’s ability to reach its enforcement goals during this administration is under threat. Moreover, the SEC has not been targeted exclusively; rather, it is one of many US agencies, including the Food and Drug Administration and the Environmental Protection Agency, that now face challenges in implementing their regulatory regimes.
It is unclear what impact the administration’s deregulation efforts will have on the actual enforcement of existing laws by the SEC or other federal agencies. However, it appears likely that, if there is decreased enforcement by federal agencies, there may be increased enforcement by their state agency counterparts as well as increased litigation by consumer groups seeking to enforce existing laws (or to challenge the non-enforcement of laws and regulations). Additionally, there is the potential threat of increased criminalization of conduct if prosecutors determine that regulators are not enforcing laws and regulations that should be enforced.
The administration’s inability, thus far, to actualize its aspirational goals has added to this uncertainty by creating an environment characterized by volatility and unpredictability. That being said, what is clear is that the administration will decrease scrutiny of and will work to lessen the regulatory burden on financial institutions. Such decreased scrutiny may introduce problems for cross-border institutions that seek to avail themselves of reduced regulation in the United States while remaining compliant with the regulatory regime in the United Kingdom, where the trend continues to be one of strengthened regulation.
The trend towards increased regulation in the UK
In contrast to the US administration’s belief that regulation inhibits growth, the United Kingdom appears to be shifting towards increased regulation as a means of promoting competition and optimal market outcomes. A key example is the Financial Conduct Authority’s Senior Managers and Certification Regime (SMCR), now in place for just over a year and due to be extended beyond just the banking and insurance sectors. The SMCR requires regulatory approval and oversight of individuals performing key functions. By 2018, another important regulatory scheme will be in effect, namely, the Second Markets in Financial Instruments Directive (MiFID II) and the accompanying Regulation on Markets in Financial Instruments and Amending Regulation (MiFIR). MiFID II and MiFIR, collectively MiFID II, seek to provide a European-wide legislative framework for regulating the operation of financial markets in the EU. The primary goals of these reforms are increased transparency of markets, a shift in trading towards more structured marketplaces, and making explicit the costs of trading and investing reforms.
Given that a substantial amount of financial services regulation has been enacted at the European level, the outcome of Brexit presents an element of unpredictability as to the United Kingdom’s regulatory landscape. The expectation, however, is that much of the EU financial services legislation will continue to apply in order for the United Kingdom to maintain regulatory “equivalence” with the European Union post-Brexit. Accordingly, while Brexit presents a prospect of significant change to the domestic regulatory regime and legislative confusion at Brexit’s implementation, it appears as though the United Kingdom will continue on its path of increased regulation.
Each nation’s regulatory scheme will affect more than the day-to-day functioning of multinational institutions. Specifically, regulations (or the lack thereof) may impact the way in which such institutions structure their activities based on the differing regulatory environments present in the United States and the United Kingdom. While institutions can and should ensure that they comply with each regulatory regime, this seemingly uncontroversial proposition is complicated by the fact that the contours of the evolving regulatory landscape in the United States and the United Kingdom remain unclear. For instance, cross-border investigations of multinational institutions have become routine matters, but the differing regulatory ethos and rules in the US and UK present issues as to which framework will govern during these investigations.
It is therefore clear that multinational institutions operating in the United States and the United Kingdom may face unique challenges in ensuring that they are not running afoul of relevant rules and regulations. In this ever-changing regulatory environment, multinational institutions must constantly be assessing what may be required of them in each country. These institutions should also assess what potential issues may arise due to their cross-border activities spanning two (or more) different regulatory frameworks. In order to be best positioned to prevent cross-border regulatory issues, multinational institutions based in the United States and the United Kingdom should be in close contact with trusted advisers who can help them navigate this uncertain terrain.