What financial institutions need to know about the Financial CHOICE Act

Dodd-Frank is one step closer to getting repealed — but there’s still a ways to go. Financial regulatory reform is making its way through Washington. The House has passed the Financial CHOICE Act and the bill will now makes its way to the Senate. There are a few things every financial institution needs to monitor closely, including how the reforms will be legislated, and which reforms will be prioritized.

How the reforms will be legislated: Two paths to reforms

The Financial CHOICE Act

Repealing Dodd-Frank and replacing it with CHOICE will require 60 votes in the Senate

In May, the House Financial Services Committee passed the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act, H.R. 10, nicknamed “Financial CHOICE 2.0”. The first version of the Financial CHOICE Act was introduced last year by House Financial Services Committee Chairman Jeb Hensarling, R-TX.  It’s since been revised and has now cleared committee.

While it may still be a work in progress, this latest version of the Act is the clearest indication yet of what the Republican leadership hopes to reform about U.S. financial regulation. It’s important that financial institutions familiarize themselves with the revisions being proposed if they hope to have any input in drafting the language that may soon replace large portions of the Dodd-Frank Act.

Repealing Dodd-Frank and replacing it with CHOICE will require 60 votes in the Senate. That may be a difficult path. The vote in the committee indicates that the proposed changes do not currently enjoy bi-partisan support. (In 2010, Dodd-Frank passed with only two Republican supporters in the Senate.) If party lines remain as intransigent as they have been to date on financial reform, the bill may face difficulty progressing through Congress. However, there may be an easier path to reform.

The Congressional Review Act

Many regulations associated with Dodd-Frank have never been officially submitted to Congress

The Congressional Review Act was signed into law by President Bill Clinton on March 29, 1996. The law empowers Congress to overrule new federal regulations issued by government agencies by a vote of a simple majority. Congress has 60 legislative days to disapprove of any given rule by simple majority vote; otherwise, the rule will go into effect.

Some point out that many regulations associated with Dodd-Frank have never been officially submitted to Congress, which is not uncommon with complex legislation. Some legal scholars suggest this may allow Congress to overrule the regulations supporting Dodd-Frank even though those rules were enacted seven years ago. This unusual approach will undoubtedly be controversial, but avoids the ordinary 60-vote cloture requirement.

Which Dodd-Frank reforms will be prioritized?

The principle changes to Dodd-Frank proposed by the Financial CHOICE Act are:

  • Modifications to the jurisdiction and structure of the Consumer Financial Protection Bureau
  • Repeal of the Volcker Rule
  • Elimination of the Financial Stability Oversight Council’s authority to designate nonbank financial companies as systemically important financial institutions (SIFIs)
  • Elimination of Dodd-Frank’s orderly liquidation authority (living wills)

Rep. Hensarling has agreed to remove the repeal of the Durbin Amendment (which limits debit card interchange fees) from the CHOICE Act. This last-minute development means that banks with $10 billion or more in assets will have caps placed on the fees they receive from debit card transactions, as originally proposed in Dodd-Frank.

Beyond Dodd-Frank

Regulatory off-ramp

Institutions meeting the high capital requirement would also be fully exempt from stress tests

The CHOICE Act does more than just repeal and modify Dodd-Frank. The most impactful provision is a new approach to supervisory oversight. Banks that maintained a 10% leverage capital ratio would qualify for an “opting out” of traditional oversight – called the regulatory off-ramp. If the institution maintained such a high capital level they would be exempt from the traditional supervisory rating system to classify a bank’s overall condition.

The so-called ‘CAMELS’ rating system is used by all supervisory regulators – it stands for the acronym measuring the adequacy of Capital, Assets, Management Capacity, Earnings, Liquidity and Sensitivity to market risk. Institutions meeting the high capital requirement would also be fully exempt from stress tests. This would be quite a material benefit for institutions to maintain the requisite 10% leverage.

Fiduciary Rule

The second critical addition to the Act is the repeal of the Department of Labor’s (DOL) Fiduciary Rule that requires purveyors of financial advice to retirement accounts to put the beneficiaries’ interests first. Postponed earlier this year, the CHOICE Act would eliminate the Fiduciary Rule entirely reinstating the traditional “suitability” rule.

CHOICE’s long road ahead

With the Administration focused health care and tax reform, it’s unlikely that meaningful financial reform will be enacted in the coming year, but drafting and negotiation will be ongoing. Now is the time for interested parties to begin weighing in with regulators and legislators.

About Michael O'Connell

Michael O’Connell is the Financial Institutions Group Practice Leader for Willis Towers Watson North America.  I…
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