The United States is poised to usher in an era of decreased regulation of financial institutions, while the United Kingdom maintains relatively robust regulation of the financial services sector following the global financial crisis. The potential impact of these differing regulatory regimes remains unclear and presents challenges to institutions that operate internationally.
How can cross-border institutions avail themselves of decreased regulation in the United States while remaining in compliance with the regulatory regime present in the United Kingdom?
In a Q&A we talk to U.S.-based and U.K.-based financial services attorneys from Eversheds Sutherland. Following the combination of London-based Eversheds with U.S.-based Sutherland Asbill & Brennan in February, they have seen this as a common issue.
Joining the conversation were partners Lewis Wiener (U.S.), Meghana Shah (U.S.), and James Southworth (U.K.).
The world is becoming more multinational, with cross-border regulations. Nevertheless, country-by-country, these regimes can be very different. Deregulation here, tightened rules there. How should firms navigate it all?
Wiener: Let me challenge that premise. I think we are seeing a lot of sawing, but I’m not sure we are seeing a lot of sawdust.
Let me use the Financial CHOICE Act as an example. A lot has been made about deregulation or, if you will, the lessening of regulation as it relates to the consumer finance area. President Trump has been critical of the Dodd-Frank Act saying it has choked off funding sources for legitimate businesses. Congress has proposed the Financial CHOICE act which would deregulate a lot of what was ushered in with Dodd-Frank.
Nevertheless, recently, the Consumer Financial Protection Bureau announced sweeping changes that will dramatically affect litigation in the United States by imposing a rule that will go into effect, without any further action by Congress, that will eliminate mandatory arbitration in consumer contracts.
“I think we are seeing a lot of sawing, but I’m not sure we are seeing a lot of sawdust.”
Lewis Wiener, Partner, Eversheds Sutherland
We have a lot of rhetoric that Dodd-Frank is going to be dismantled and replaced by the CHOICE act and we are going to see a diminishment in the CFPB’s powers.
There’s the rhetoric, but in fact the CFPB just took one of the most dramatic regulatory steps that an executive branch agency has taken in some time by fundamentally changing the way Americans interact with corporate America. It is taking away a powerful tool, one that the U.S Supreme Court has confirmed the validity of, that corporate America can use to curb litigation costs.
What about enforcement?
Wiener: There is an adage to always follow the cash. Look at the President’s budget and where the cuts are focused. Environmental Protection Agency. Department of Justice. The various executive branch agencies are slated to take significant budget cuts.
So, what does that mean?
There was a recent article in the New York Times discussing the shadow administration that is implementing President Trump’s “one in-two out” memorandum.
I think we are going to see deregulation happen in two ways. We are going to see this through the front door, in that there is actually going to be a diminishment in regulation. The administration is committed to that and there are people in place and an apparatus in place that will allow that to happen.
The other changes that may happen are through the back door. What I mean by that is that if you don’t have the money and you don’t have bodies to enforce legislation you are going to see a lessening of enforcement, which is, in a way, deregulation.
Executive branch agencies are going to have limited resources and will need to prioritize where they devote resources for enforcement. We are going to see both active deregulation, and passive deregulation. While that is happening, we are seeing increased regulation in jurisdictions like Singapore and the U.K., with a heightened focus in the consumer area.
“You want to be able to conduct your investigation in a way that you are going to receive the credit you want to receive and to the extent you need to make voluntary disclosures while still maintaining complete compliance with the data privacy laws.”
Meghana Shah, Partner, Eversheds Sutherland
Southworth: In the U.K., the emphasis is very much around consumer protection, and individual accountability within firms.
The senior management certification regime is being widened out to all firms that are overseen by the Financial Conduct Authority. That places some fairly tough obligations on individuals within those financial firms, holding them to the highest standards of conduct. That includes things like requirements for them to report maters that they encounter within their own organizations. It puts the emphasis on regulations within the firms themselves.
The increased use of investigations by U.K. financial services regulators, including the FCA [Financial Conduct Authority] and the PRA [Prudential Regulation Authority], is a tool to establish and uncover whether there is any financial misconduct going on at firms within the regulated sector.
They can more efficiently understand whether or not there is any misconduct within a particular organization, operating within the financial services sector. If there isn’t, then they close down the investigation. If there is, and it is sufficiently serious, then they will go down a prosecutorial, litigation route.
Regulators are making it very clear that what they need to do is move away from a traditional system where they would only launch formal investigations into firms where they were confident it would then lead to successful prosecutions. The emphasis is on getting firms to cooperate with the regulators.
At the U.S. Securities and Exchange Commission, there is an emphasis on technology and addressing smaller violations, known as the “broken windows” approach. Are others taking a similar approach?
Wiener: On the U.S. side, it really comes down to budget and resource allocations. You really need to have the resources so you can focus on both the big and the little. The question becomes where you are going to focus your efforts because you have fewer resources?
Southworth: The approach in the U.K. is to get the firms themselves to pay for investigations.
The Financial Services and Markets Act enables regulators to appoint an independent, skilled person who will go into an organization to investigate a particular issue. They will report their findings to the FCA and the firm itself is responsible for the payments and costs of the independent person in carrying out their work.
That enables the regulators to get the firms to fund investigatory activities that in the past they would have considered doing themselves. Obliviously, that frees up a lot of resources.
Regulators are certainly not allowing resource issues to get in the way of the amount of enforcement activity they carry out.
Shah: The discussion of technology is what multinationals are doing and how can they cope with this dynamic environment.
The obvious challenge is designing a program, including the technological elements and human personnel elements, needed to respond to the changing environment.
What we are seeing is multinationals tethering themselves to their own internal controls and ensuring they remain robust and solid in the face of the changing landscape. They want to be responsive and adaptive, rather than just reactive.
What I think is important for multinationals operating in these different spaces is to be able to operate fluidly while still maintaining their robust infrastructure and a set of principles that remains relatively unchanged amid the ebbs and flows of the regulatory landscape
A lot of these companies need to become increasingly comfortable with bespoke and novel solutions for issues where, maybe, regulators hadn’t demanded those solutions before.
For example, dealing with data security privacy restrictions in one jurisdiction, usually in one of the countries in the EU, while needing to conduct an investigation in the U.S. side that requires a free flow of information. You want to be able to conduct your investigation in a way that you are going to receive the credit you want to receive and to the extent you need to make voluntary disclosures while still maintaining complete compliance with the data privacy laws.
That’s where being open to novel solutions comes into play, and that requires having robust internal controls in place, globally.