On the fifth anniversary of the signing of the Wall Street Reform and Consumer Protection Act, Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, and a panel of regulatory experts gathered at an American Enterprise Institute meeting to discuss the impact of the legislation on America’s economic system.
Hensarling has been successful in finding bi-partisan support in modifying some financial regulations, particularly where federal courts have contended that regulators have failed to prove the benefits of the suggested remedies. But in his recent speech at the Institute, he made it clear that his ultimate goal is the repeal of the Dodd-Frank Act.
Fines and legal fees paid by financial institutions have risen dramatically in the past five years. Violations of regulations covering money laundering and sanctions have been extremely costly to banks, with penalties negatively impacting balance sheets and shareholders’ equity.
The Dodd-Frank Act has expanded the role and power of the federal government in corporate affairs and created a new and growing need for compliance risk management. The job of chief compliance officer, responsible for the implementation of internal and external governance policies and procedures, has grown from a clerical position to a new type of professional often reporting directly to the board and primarily responsible to the chief executive.
The passage of the Sarbanes-Oxley Act of 2002 gave federal authorities oversight of what had been mainly under the control of state corporation laws. Before Sarbanes-Oxley, the concept of compliance management was a lower priority and staffed at lower levels of organizations. The legislation opened the door for federal intervention at all levels of regulation and compliance with external governance policies and adherence to laws.
With the passage of Dodd-Frank in 2010, members of Congress further increased federal oversight of corporations. Inclusion of the Consumer Financial Protection Act as part of Dodd-Frank had little to do with preventing failures of financial institutions deemed too big to fail. The establishment of the Consumer Financial Protection Bureau has provided vast new opportunities for federal regulatory agencies to expand their reach far beyond normal banking operations. In less than five years, the Bureau, operating without Congressional oversight, has imposed fines at a rate never previously matched by a new regulatory agency.
Smaller banks are hurt by the high costs of administering the new rules and staffing for regulatory strategy and planning, as these rules were originally designed for larger banks. Dodd-Frank has become extremely burdensome and is contributing to a growing number of bank mergers and bankruptcies.
In addition, small- and medium-sized businesses are finding it hard to hire new employees, considering the added costs of health care and other benefits. The regulations that were designed for large companies have made it difficult for Americans to start a new business and to keep one going with the costs of added staffs for compliance with the new legislation.
The costs and uncertainty of expanded federal regulation are inhibiting innovation and stultifying capital expenditures and corporate growth. If the U.S. economy is to recover, then growth must be higher than the current anemic gross domestic product growth rate. We must create a new climate for innovation and investment with a careful and objective analysis of the impact of regulation, and discuss modifications of rules that have a negative impact on economic growth. It is time for statesmanship, not rancor and polarization.
James is a professor at Pace University’s Lubin School of Business and chairman emeritus of its Center for Global Governance, Reporting and Regulation. In collaboration with the Association of International Bank Auditors, James created the Certified Compliance and Regulatory Professional certificate program at Pace.