With the new presidential administration and the Republican-controlled Congress finding their footing, professionals in the financial services industry are talking about deregulation and what that future may hold. This is because President Trump promised extensive deregulation during his campaign, and the Republican Party has been pursuing that goal vigorously for decades. Now, it seems as though the current administration will make good on its campaign promises, with wide scale effects for many financial companies and institutions.
So, what is this deregulation going to look like, and how will it affect financial services, exactly? As we are discussing the complexities of an intricately managed industry and regulatory systems, we need to examine how the finance sector will respond to any changes in the coming years and months. With these expected changes, let’s look at the future of finance. In short, expect a greater emphasis on IT for financial companies and a broad shift towards improved financial technology services as businesses and markets look to expand in response to market growth.
What Does Deregulation Entail?
To consider how deregulation will actually affect the financial services industry, we have to parse out what the Trump administration and the Republican-controlled Congress mean when they talk about the subject. Deregulation is defined as the simple “process of removing or reducing state regulations,” but the reality of this process today is much more complicated.
This is due to the complexity of the financial regulatory architecture and the financial services industry itself. The government can’t simply go in and start removing regulations and expect everything to work smoothly. Further, given the current political climate, regulators can’t just close their doors and let financial institutions loose. Many of the present administration’s own constituents expect to have some protection against predatory financial practices, and people in developed countries everywhere are wary of financial institutions after the last financial crisis.
Today, the chief body of fiscal regulation has their sights set on the Dodd-Frank Act of 2010. Dodd-Frank contains a set of regulations that makes restrictions on mortgage lending and derivatives trading. At the time, lawmakers were concerned about putting an end to the proliferation of subprime mortgages and unstable financial instruments like derivatives. However, the new presidential administration and Congress claim that this regulation is stifling competition and growth.
Replacing Dodd-Frank
The present state of the regulatory system and the political climate both account for the direction the Republicans are going with their deregulation agenda. Instead of simply repealing Dodd-Frank and gutting the regulatory apparatus, they are looking to replace it with the Financial CHOICE Act, which weakens certain regulations and strengthens others.
It does this not by clearing out regulations wholesale, but by restructuring the restrictions to make them friendlier for various businesses. Republican lawmakers have complained that the existing regulatory structure employs a cumbersome “one size fits all” approach that strangles smaller financial services businesses with burdensome regulation. The Financial CHOICE Act’s stated intent is to develop regulations that are appropriate for the size and risk of a given institution.
Republicans also want to get rid of the “too big to fail” dynamic by ending taxpayer-funded bailouts. Whether this means that the government will simply let insolvent institutions fail in the future is unknown at this point.
Under the Financial CHOICE Act, the Consumer Financial Protection Bureau would also be eliminated. This regulator bureau, which has a single director, would be replaced with a limited five-person bipartisan committee. This committee will have less power to stop various types of lending, which opens up a sphere of activities for various financial services businesses. As for the other regulatory agencies that make up financial services regulation, they won’t necessarily be merged or closed, but reorganized and re-evaluated.
Finally, to follow through with their promises to protect investors and consumers, Republicans want to strengthen disciplinary regulations in the form of harsher penalties for fraud, and greater accountability for regulators themselves.
All in all, Republicans want to alter the regulatory landscape so that it is still protecting investors and consumers, and at the same time, they want to loosen various protections that are thought to stifle the market activities of finance.
Future Trends and Attitudes
Given the complexity of the financial regulatory system, the future of the regulatory landscape is still not clear. Republicans will work to advance their agenda of dismantling Obama-era restrictions, but it will take time for changes to be legally implemented, and for specific effects to be known. The financial sector may have a difficult time sorting out how the changing regulatory architecture affects them, even after the deregulation agenda is far advanced. What we can talk about, however, is broader industry trends and attitudes surrounding these changes.
We want to stress that IT for financial companies will become more and more important, and there are a couple of good reasons to support this. What the history of deregulation has told us is that deregulation tends to free up interstate and international exchanges, and it also results in a flourishing of creative financial products. Various types of investment and commercial banks end up merging, and new financial services businesses spring up around the world to compete with each other, oftentimes over long distances. Banks develop new, complex financial instruments in order to expand their services and better manage risk.
There isn’t a strong reason to believe that these trends will reverse, especially with the next coming wave of deregulation. Rising populist and nationalist sentiment may place additional pressures on politicians to reign in fraudulent financial practices as well as unpopular free trade agreements, but we can also predict an era of growth in the financial services.
The rise in interstate and international competition, the emergence of competitive financial businesses, and the creation of new financial instruments all share common demands for innovative financial technology services that can keep up with the demands of expanding markets. It takes powerful technologies to manage long distance and high-speed banking, trading, and investing. It also takes sophisticated programs to handle complex financial instruments and trading arrangements. All of this technology has to be effectively managed, which means an increased flow of resources towards IT for financial companies.
Conversely, all of these changes may contribute to instability in various sectors of the financial industry. Many emerging markets are driven by young consumers who have grown up in an era of deregulation, financial creativity, and financial instability. After the financial crisis of 2008, many young consumers no longer trust traditional financial institutions.
Of course, as consumers still have a need for financial services, their demands have pushed beyond the scope of mere brick and mortar locations and face-to-face interactions with personnel and bank tellers. To address this, many financial services businesses are investing in various financial technology services like web-based banking and other financial services. Young consumers are much more comfortable using various technologies like mobile banking apps, so financial services businesses are putting their resources into those features.
Preparing for the Future
Given the current political climate, we can expect a steady drive towards deregulation among many lawmakers. The Republican-sponsored Financial CHOICE Act, is one of the model pieces of legislation signalling this shift. Though we don’t know what types of measures will actually pass congressional review and and executive approval, we can expect lawmakers to do what they can to free up financial services businesses from regulation, while implementing harsher penalties on fraud to address consumer protection. What the trends overwhelmingly indicate is an increase in financial technology services to manage growth and usher in new consumers. The industry would do well to place its resources in IT for financial companies.
So, if your business is primed for growth, NIC is here to help. With a comprehensive suite of services ranging from cloud hosting, cyber security, disaster recovery planning, and routine IT support, we have the expertise and resources needed to help your business succeed. Contact us today to learn more about our services.
