A plan to include US insurance brokers and others who provide retirement planning advice under a legally-binding “Fiduciary Rule”, like one that already applies to the country’s Registered Investment Advisors, is now seen to be in doubt, with the election of Donald Trump as president.
The Fiduciary Rule was one of several that Trump singled out during his campaign as in line for the chop, on grounds that such regulations hampered businesses and burdened them with unnecessary costs. It is due to begin taking effect next April but is being opposed by the industry, including such organisations as the National Association for Fixed Annuities, which filed suit in an effort to halt the rule’s implementation.
As reported here yesterday, the law that would affect offshore financial advisers and their clients most that the Republican party has officially said it is looking to repeal is FATCA. However, this proposal, though a “plank” in the party’s platform and a major concern among expat Republicans, wasn’t a key issue for Trump’s US-voter-focused campaign.
The Foreign Account Tax Compliance Act, as it is formally known, obliges all non-US financial institutions to report to the US Internal Revenue Service on any accounts held by Americans, to enable the IRS to ensure that these Americans don’t avoid paying the taxes they owe.
Other legislation affecting financial services companies that is seen as likely either to be chopped or at least modified by Trump, experts say, includes such post-global financial crisis regulations as the the Dodd-Frank Act.
Some experts have suggested that a rally yesterday in the shares of certain US companies seen as likely to benefit from a regulatory relaxation may have been at least in part due to a belief that such a change is now likely.
Meantime, others have noted that its one thing to say something during a campaign and another to actually take action when confronted with the practicalities and business of governing.
Australia’s FoFA experience
If Trump does take an axe to recent regulations aimed at cutting red tape on behalf of financial services businesses, he will be following a lead set in 2014 by Tony Abbott, who was elected prime minister of Australia towards the end of 2013, and promptly set to work un-doing the just-enacted investor protection legislation of his predecessor, contained in a package of reforms known as the Future of Financial Advice, or FoFA, often described in the UK as that country’s answer to the RDR reforms.
In particular, Abbott, responding to industry pressure, sought to make it easier for advisers to receive commissions and other so-called “conflicted payments”.
Since then, Australian regulators have been back and forth on the details of FoFA, which is now in force, in response to arguments on both sides of the advice equation. (To see a summary of these changes on the Australian Treasury’s website, click here.)
Another example of how regulations enacted in the wake of a financial crisis were subsequently repealed was the US Glass–Steagall Act of 1933, which sought to limit what banks were able to do in terms of areas of business, in the wake of the Great Depression. This was repealed in 1999 by President Clinton, in response to pressure from the marketplace. Some critics of this repeal later claimed that eliminating Glass–Steagall may have contributed to the global financial crisis of 2008, by enabling banks to engage in risky businesses that they shouldn’t have been in.
US insurance brokers oppose the introduction of the Fiduciary Rule for the same reason that Australia financial services businesses took issue with FoFA: They argue that it will increase their costs.
However, regulated financial advisers in the US have been held to a “fiduciary standard” since the early 1940s, and many of them say they see no reason why being obliged to put their clients’ interests ahead of their own when selling them financial products — which is what the Fiduciary Rule requires — should not be mandatory for those selling insurance products and retirement plans. Currently, US insurance brokers must meet a lesser “suitability standard”.
“Let me be clear: Scaramucci does not speak for real financial advisers,” said one such adviser, in a comment piece posted on the CNBC website last month, referring to canti-Fiduciary Rule comments made during the Trump campaign by hedge fund partner and Donald Trump adviser Anthony Scaramucci.
“Real” financial advisers — for instance, those known as Registered Investment Advisors (RIAs) — already are held by law to a fiduciary standard,” this adviser, Tim Maurer of Buckingham, a Focus Financial Partners-affiliated advisory firm in Charleston, South Carolina, wrote.
“It is only brokers and other advisers who sell financial products for a commission that are clinging to a lesser bar.
“Real financial advisers overwhelmingly support the [US Department of Labor’s] Fiduciary Rule, which only applies to Americans’ retirement accounts.
“While the rule isn’t perfect and contains some loopholes, real financial advisers embrace the wider application of the fiduciary standard, and remain hopeful that the rule will expand further to ensure anyone who receives financial advice on any account or in any capacity is also protected by it.”
‘De-fanging’ is ‘more likely’
One of the most comprehensive post-election analyses of the probably future of the Fiduciary Rule is that of US financial blogger and financial adviser Michael Kitces, who takes the view that Trump is more likely to “de-fang” the law than repeal it.
This, he says, in a blog and video posted yesterday, is “because the reality is that while the rule will not be enforced until next April – after Trump takes office – the regulation itself became official this past April. And the president doesn’t have the power to just immediately enact a massive change to an existing regulation.
“If Trump tried to halt it immediately, the fiduciary advocates would have their own opportunity to sue the Department of Labor, and would likely be successful.
“[However], he could ‘defang’ it by directing the Department of Labor to only minimally enforce it, akin to the SEC’s similar failure to enforce the existing provisions of the Investment Advisers Act of 1940 that already requires brokers who give substantive investment advice to register as fiduciary investment advisers. Which would mean the fiduciary rule is still on the books.”
Dodd-Frank plans unclear
David Guin, a New York-based partner at Withers LLP, the internationally-focused, London-based law firm, said it was difficult to anticipate “exactly what president-elect Trump plans to do with respect to Dodd-Frank”, even though he had “specifically criticised” it during the campaign, and the fact that reducing government regulation “was an important part of [his] campaign rhetoric”.
“Most of his specific comments have focused on decreasing bank regulation to stimulate lending, and dismantling the Consumer Financial Protection Bureau,” Guin noted.
“I have not seen any specific plans to roll back the portions of Dodd-Frank that increased regulation of fund managers.”
Indeed, Guin added, Trump “does not appear to be a fan of fund managers”.
“On several occasions, he criticised the tax treatment of fund managers’ carried interest, and vowed to change the rules to their disadvantage.”
Where Trump’s less-is-more approach to red tape may be most likely to be observed, Guin said, could be in the area of new regulation, where he has “vowed a moratorium”.