A version of this post appeared in The Hill.
The past decade in Washington, D.C., has seen financial services regulation in the United States elevated from a dorky policy backwater to a career-making battleground.
The 2008 financial crisis drew popular attention to banks, insurance companies and trading desks in a way it never had before, and politicians responded in kind, creating new checks on perceived misdeeds or fighting for private-sector freedom to drive economic growth.
On this point, President Trump’s first two years in office have been characterized by a flurry of financial deregulation whose momentum will not be abated by a Congress likely gridlocked and headed into a contentious presidential campaign season.
This has created a rare opportunity for savvy, progressive governors and state officials to seize the spotlight and become the country’s fiercest cops on the financial beat.
As the Federal Reserve’s vice chairman for supervision, Randal Quarles is one of the president’s hand-picked overseers of financial regulation. Quarles recently gave remarks on the future of financial regulation and painted a picture of a reformed regulatory framework and an administration intent on “recalibrating, in light of experience, the post-crisis regulatory regime.”
This is the latest example of federal regulators stepping back from their roles or creating more limited roles for themselves as ardent overseers of the financial system, which has left the perception of a vacuum of financial regulatory leadership and accountability.
With Democratic congressional leaders, including Rep. Maxine Waters (D-Calif.), the next likely chair of the House Financial Services Committee, able to create a lot of noise but few actual rules of the road, opportunistic Democratic governors and other state officials are seizing the chance to champion financial issues now top of mind for voters.
That dynamic is bound to accelerate as we enter the 2020 campaign season and politicians begin positioning themselves for runs at new offices, including the 11 governorships on the ballot and, for some, the prized presidency.
For the past five-and-a-half years, I have had a front-row seat to this important debate, first at the U.S. Chamber of Commerce and now at Edelman, advising companies from the Fortune 500 to fledgling startups on how to think about — and prepare for — shifts in the financial regulatory environment.
One fact that has become clear is that it is often the largest firms that are the most exposed to the risks of a balkanized regulatory framework. Companies with a simpler regional or local footprint do not face the headaches and costs of having to comply with potentially inconsistent and uncoordinated rules applied to the same products or services across dozens of jurisdictions.
But big, national companies — the ones so often pointed to as having the most influence — do face those challenges. Business leaders at those companies are forced, as a practical matter, to comply with the strictest regulations on the books in any state where they operate or else run up costs establishing 50 different systems to tailor compliance.
This dynamic, combined with federal regulators’ abdication of the crown of financial regulatory ferocity, has not only created an opportunity for governors and other state officials across the country, but it has also created an incentive for them to act.
Voters remain concerned about bad financial actors and the safety and security of the financial system. In a recent Edelman study of affluent millennials, three out of every four said it is only a matter of time before the bad behavior of the financial industry leads us into another financial crisis.
The substantive action to meet that demand for stricter oversight is now in the states. Enhanced fiduciary rules for financial advisors and brokers, once made law by the U.S. Department of Labor, have been pulled back during the current administration.
Enter states like Nevada and, most recently, New Jersey, which recently proposed its own best-interest standard for investment advisors.
Progressive pressure to update corporate governance regulations, often the purview of the U.S. Securities and Exchange Commission, has also been percolating in state capitals. Merely a month ago, California signed a new law mandating the number of women that must sit on corporate boards for companies based in the state.
With each new state-level proposal, the challenge and potential reputational risk for financial firms increases exponentially. The good news for business is that this trend leading us toward a new world of escalating local regulation and emboldened state regulators is predictable.
The table is set in Washington for a two-year stalemate and an administration intent on loosening the reins — a “significant simplification of the regime,” as Quarles put it.
It is time for financial services leaders to shift their focus to where the action is and where the exposure will be. Failing to respond quickly enough to these changes in the regulatory environment risks compounding the costs of making their case in state capitals and with their customers.
But the true key to long-term success will be to recognize that fear of the financial industry, driven in part by a lack of understanding, is real, but can be remedied by a protracted effort to authentically connect with people’s lives. Meanwhile, comfort in a Washington victory only means one has not realized that the front line has shifted.
Chris Donahoe is a vice president, Financial Communications & Capital Markets, Washington, D.C.