US President-elect Donald Trump has said he will repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act. As Dodd-Frank created the Consumer Financial Protection Bureau, the fate of the agency under the new Administration appears uncertain. US analysts discuss their views with Robin Arnfield
Dodd-Frank was passed in 2010 in response to the 2008–2009 financial crisis. A key element of the act’s remit was to tackle unscrupulous behaviour by financial services companies, such as credit card issuers forcing unsuspecting cardholders to accept overpriced insurance and other add-on features.
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The Durbin Amendment to Dodd-Frank introduced caps on debit card interchange, and stipulated that merchants must be provided with a choice between at least two unaffiliated networks for purchases made with debit cards.
“The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation,” Trump’s official Transition website states.
The CFPB
As historically there was little government oversight of the consumer credit industry, the CFPB was launched in 2011 to defend consumers.
Its reforms include creating rules requiring banks to evaluate consumers’ ability to repay mortgages, reining in debt collection agencies, and requiring issuers to pay hundreds of millions of dollars to credit cardholders in compensation for illegal practices such as deceptive marketing.
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By GlobalDataIn October 2016, the US Court of Appeals for the District of Columbia Circuit made a ruling that the CFPB’s structure is unconstitutional, with insufficient supervision of the actions of the CFPB’s Director. The Washington Post reported that the Federal appeals court called for the CFPB to be restructured so that the director could be removed by the President at will. Under Dodd-Frank, the director can only be removed for ‘cause’.
If the CFPB is unable to overturn the Federal appeal court’s ruling, this could see CFPB director Richard Cordray, who has been aggressive in pursuing companies that mistreat consumers, being replaced by President-elect Trump before the end of Cordray’s term, which expires in 2018.
Al Pascual, SVP, research director, head of fraud and security at Javelin Strategy & Research
“Defunding of the CFPB is certainly a possibility under the new administration, which could subsequently affect how FIs react to the Wells Fargo settlement,” says Pascual.
In September 2016, Wells Fargo was ordered to pay $185m in fines and penalties to settle what the CFPB termed ‘the widespread illegal practice of secretly opening unauthorised deposit and credit card accounts’.
In a news release the CFPB said: “According to the bank’s own analysis, employees opened over two million deposit and credit card accounts that may not have been authorised by consumers.”
Wells Fargo must pay $100m to the CFPB, $50m to the City and County of Los Angeles, a $35m penalty to the Office of the Comptroller of the Currency, and full restitution to all victims of the scheme.
“If the threat of a similar enforcement action or settlement by regulators for unauthorised account opening were off the table, FIs’ efforts to examine and redesign their sales incentive and related risk oversight programmes would likely come to a standstill,” Pascual says.
Either abolishing the CFPB or replacing Cordray with a director who is more lenient towards financial services companies, might contradict Trump’s portrayal of himself as a champion of ‘the little guy’ against the big corporations.
But Pascual says: “Unwinding the CFPB and protecting bank customers from questionable practices aren’t necessarily mutually exclusive.
“Prior to the CFPB being established, other financial regulators were tasked with protecting bank customers from abuses. The fact that this wasn’t the sole or even primary mandate of these regulators, however, bolstered the argument for the CFPB’s existence.
“In the absence of the CFPB, other financial regulators could pick up the slack – which would also address some of the concerns of regulatory overreach by the CFPB, as only banks would be affected. That would leave the states to manage non-bank lenders and others such as collection agencies. Also, the Federal Trade Commission (FTC) would have jurisdiction in the case of unfair practices, just as it does today.”
Pascual says credit and debit card interchange rates and debit card routing have yet to be fully settled, as evidenced by the recent FTC inquiry into Visa EMV debit card routing and continuing merchant lawsuits on credit card interchange.
“It isn’t entirely clear on which side of the argument the new administration would fall; some of the most powerful companies in the US are on either side of the issue,” he says.
“This is one drama that continues to drag out, partially because the diverse parties and logistics involved make the implications of federal intervention challenging, no matter the side they end up supporting.”
Rick Oglesby, president, AZ Payments Group:
“Trump is clearly anti-regulation and he has specifically targeted Dodd-Frank as a set of regulations that should be pulled back.
“That said, Trump has also shown clear indications that his pre-election rhetoric won’t precisely match his post-election activities, and he’ll face substantial political and logistical issues when trying to repeal Dodd-Frank.
“I think the most likely scenario is that Dodd-Frank will be amended in the most problematic areas, specifically with regard to providing smaller financial institutions with more leeway.
“Trump will probably seek the easiest-to-implement changes around which he’ll find the least political resistance, and move on. That will allow him to claim victory without getting too bogged down.”
David Tente, executive director of the US, ATM Industry Association (ATMIA)
“The ATMIA has given the regulatory situation some thought, as Congress had talked about repealing Dodd-Frank even before the election, and it’s possible the act might be repealed,” Tente says. “We think Dodd-Frank was a terrible piece of legislation, but, if you take away Dodd-Frank, you don’t know what you might get.
“On the other hand, Dodd-Frank has only existed since 2010, and we survived all those years before 2010 without Dodd-Frank. So, if it’s repealed, do we need to replace it with additional legislation?”
However, if Dodd-Frank is repealed, it might be an opportunity for the US ATM industry to get some rule changes built in that would give ATM operators a routing choice for ATM transactions, Tente believes.
“This is something we have been calling for a long time,” he says. “At the moment, the debit card routing choices stipulated by Dodd-Frank apply to merchants on the retail side, and debit card issuers have routing choice for ATM transactions.
“When the Federal Reserve was asking for comments on the rules for Dodd-Frank, we made a case for ATM operator routing choice, but none of our recommendations were adopted.”
Tente says the ATMIA does not think that the government will abolish the CFPB.
“For the time being, the Federal Appeal Court ruling gives the President the authority to replace the CFPB’s director,” he says.
“Our industry has been pushing to make the CFPB director’s position into a management committee, like the Federal Reserve’s Board of Governors.
“Even though the Fed has a director, the decisions are made by committee. So the ATMIA is in favour of taking the decision-making power out of the hands of a single CFPB director.”
Were the CFPB to be abolished, there would be a lot of concern that consumers would be disenfranchised, Tente says. “So abolishing the CFPB wouldn’t go down well,” he says.
The ATMIA’s main regulatory concerns are that no caps on ATM surcharging should be introduced and that ATM operators have routing choice. “Some people would say that, since there is a cap on debit fees on the retail side, there should be a cap on ATM surcharging,” Tente says.
“Currently, there is no cap on ATM surcharging and we want to maintain that. We’ve always said variable ATM surcharging is best as it helps ensure competition among ATM operators and ensures consumers have convenient access to cash at ATMs.”
Ben Jackson, director, prepaid advisory service, Mercator Advisory Group
“Until the Presidential inauguration and the new Congress, it’s anyone’s guess as to what will really happen,” says Jackson.
“The financial services industry has looked upon Trump’s victory as a victory for them, as they think the financial services regulations will be pulled off them. Maybe this will happen, but there are two things to consider.
“While we certainly have a Congress and a President who’ve said they want to reduce government regulations, these people were all elected on a platform of shaking things up and helping the little guys. And some of the same distrust for big government extends to large financial institutions.
“So, if the politicians rush in and say: ‘We’re taking the shackles off the large FIs’, they might face a considerable backlash. All these elected representatives answer to their constituents, and if these constituents are less favourably inclined towards the financial services industry, then it may not be easy for the politicians to say: ‘Let’s pull off all the regulations.’
“Consumers who lived through the financial crisis maybe lost their home or paid a lot of fees on their bank products,” Jackson says.
“A lot of these people voted for the Presidential candidate who is anti-establishment. If Trump’s first move is to prop up big business and his acts don’t support more jobs, there will be a lot of disappointed voters in 2018 when it’s time to re-elect a lot of the Congressmen.
“But, in the past, we’ve seen instances of people voting in politicians and being surprised by the actions they took. It’s premature for the financial services industry to believe that all its regulatory problems are solved.
“While the Republican Party controls the House, the Senate and the Presidency, the Republican Party has had internal disunion, with many Republicans saying they wouldn’t support Trump.
“So, while it looks fairly unified, there is the potential that Congress won’t march in lock step. While there has been a promise to roll back Dodd-Frank and to deal with the CFPB, on one side of the issue, you have the large FIs which have considerable weight in the Republican Party. On the other side, you have the large retailers and the retail industry, which has considerable weight as businesses.
“So it’s a not a slam-dunk. There is no obvious pro-business stance necessarily, in that one segment of the business community can argue that repealing Dodd-Frank is good and the other can argue that it is bad.”
Jackson says that even if Dodd-Frank is repealed, it doesn’t necessarily mean that debit card interchange rates will shoot back up overnight, as debit interchange rates were capped by the government.
“What we are facing is another year and maybe longer of regulatory uncertainty,” Jackson says.
“The financial services industry has a set of regulations that it is operating under today and these regulations cannot be changed overnight. So the industry needs to work with the facts as they are today as opposed to what might happen in the future.”
Jackson predicts that there will definitely be regulatory changes in the US. “What those changes look like will depend on where they occur and whose interests are served,” he says. “I don’t think there is any one clear path through all of this.”
If the regulatory power of the CFPB were to be rolled back, unlike Javelin’s Pascual, Jackson is not sure there would be no incentive for banks to clean up sales processes.
“We live in an age where the power of public opinion can be mobilised very rapidly via social media,” he says. “Also, because of new financial technology, people have more options and it’s very easy for them to move to another bank. These two factors mean that the power of the customer can be amplified.”
Writing in a Mercator Advisory Group blog, Jackson says: “I think fintech companies have opportunities to get more regulatory space to develop, and they may be able to tap into the anti-establishment current by positioning themselves, as [digital bank] Simple and [prepaid card issuer] Green Dot have tried to do, as alternatives to the establishment.”
Sarah Grotta, director, debit advisory service, Mercator Advisory Group
Writing in a Mercator Advisory Group blog, Sarah Grotta says: “Despite the Republicans holding on to control of Congress, I think the pace of change will be slow and tortured. The [Republican Party] GOP is far from unified, so its ability to come together around ideas, an agenda, or even leadership will be tested. Let’s remember too, many Republicans don’t think of Trump as a Republican – he’s just not Clinton.”
In June 2016, Republican Representative Jeb Hensarling, chairman of the House Financial Services Committee, introduced the Financial Choice Act, a bill that would roll back large sections of Dodd-Frank.
The bill said: “Dodd-Frank’s particular brand of regulatory complexity and government micromanagement has made basic financial services less accessible to small businesses and lower-income Americans, by saddling America’s small and medium-sized community financial institutions with a crushing regulatory burden.”
“Representative Hensarling’s bill is being called the GOP alternative to Dodd-Frank,” Grotta writes. “This bill calls for the repeal of interchange controls. I’m not sure that is an issue with enough broad concern beyond the payments industry for a fragmented House to get behind. It certainly has a better chance than it would have had under a Clinton administration with Sherrod Brown and Elizabeth Warren at her side.”
Ed O’Brien, principal, competitive directions argues: “All early indications point to a desire to repeal, or perhaps significantly modify, Dodd-Frank and the power of the CFPB. But it’s unclear whether this can be done while trying to work with Democrats across the aisle.
“I think the positioning of these initiatives (and others) will become clearer as we hear about the priorities noted by Trump, his transition team, and his cabinet appointees.
“It’s possible there may be some room (for softer positions), based on Trump’s comments about his previously hardline stances such as on ObamaCare, and this could be the case with these topics. We’ll have to wait and see what occurs in the coming months.”
Obama advisor’s view
US President Barack Obama’s chief economic adviser Jason Furman told the BBC’s Hard Talk programme that it is unlikely President-elect Trump will be able to repeal certain legislation passed during the Obama administration. Furman told the BBC that the ‘wisdom of checks and balances’ in the US political system limited executive power, meaning it could be slow and difficult to get anything done.
“It looks like this election was a big change in terms of who the leaders are. When you look at the actual legislative output – the actual change in policy – I think you’re going to see a smaller change,” concludes Furman.
