Clearly, the new US Administration has wasted little time in signaling that it intends to make some material changes to the existing US financial regulatory regime, as typified by the Dodd-Frank Act, and all the regulations that have flowed from its enactment.
On February 3rd, President Trump issued an Executive Order requiring the Department of the Treasury, in conjunction with the members of the Financial Stability Oversight Council (FSOC) to undertake a broad review of the impact of the Dodd-Drank Act (the Act) based upon 6 rather (and perhaps deliberately) vaguely-worded “Core Principles”; and deliver its conclusions within 120 days, so June 2nd.
In reality, the Executive Order can have little direct effect, because any material changes in the scope or content of the Act require action by Congress. Of course, the Congress is now Republican-controlled, and many members have made it clear that they wish to see the Act’s scope “rolled-back”. However, there is little consistency in in terms of what “roll-back” means, and (as with the Affordable Care Act) it is easy to talk about a “repeal” and much harder to execute one. As the Act was more descriptive rather than prescriptive, and focused on codifying rule-making authority and empowering regulatory bodies to do the actual writing of rules, it is probably more important to keep an eye on the subsequent behaviour of individual regulatory bodies and how their governance changes.
It is also worth noting that, while most of the response to the Order has been focused on its potential impact on the Banking sector, it should not be forgotten that the Act was much more broadly-based, establishing the Federal Insurance Office (FIO) as well as the Systemically Important Financial Institution (SIFI) designation, and thus also affecting the (re)insurance sector. Responses to the potential demise of the FIO have been decidedly mixed. Perhaps not surprisingly, the NAIC is strongly in favour of the FIO being abolished; whereas the American Insurance Association (AIA) sees value in its continuing existence as an official entity that can represent the US in international fora, as well domestically in advising the Treasury on the management of the Terrorism Risk Insurance (TRIA) programme.
Therefore, so far as the US (re)insurance sector is concerned, the impact of the Order, or of any repeal or modification of the Act is likely to be modest. Much more important is the likely impact of the implementation of the recently-concluded Covered Agreement on Cross-Border Insurance and Reinsurance (the Covered Agreement) between the US (as represented by the FIO!) and the European Union. Within the Covered Agreement, two components stand out: the ending of the requirement for EU-based reinsurers to post collateral as a condition for their cedants getting credit for reinsurance for statutory accounting purposes; and the elimination of local presence requirements within the EU for US (re)insurers. While, as always, “the devil will be in the detail” and full implementation may not occur for some 5 years, the Covered Agreement seems likely to change the business and regulatory landscape for (re)insurers in material ways.
The lesson for the (re)insurance sector here would seem to be to ignore all the rhetoric over the Order, and focus more closely on thinking through the likely consequences of the Covered Agreement.
The Awbury Team