by Ian Welch, head of policy, ACCA
So the Dodd-Frank Bill, dubbed the biggest overhaul of US financial regulation since the 1930s, has been signed into law.
President Obama's political opponents are already warning that the vast 2,300 page bill will damage US competitiveness and lead to business uncertainty, given that it instructs government agencies to create hundreds of new rules and regulations and guidance notes.
It will only be possible to say whether such a huge regulatory and structural change is a success with the benefit of several years' hindsight, but there are parts that look good. The establishment of a regulator for consumer protection has to be a good thing, given the sub-prime mortgage disaster that sparked the financial crisis. While the principles of caveat emptor must always apply, groups of consumers who are new to financial products markets are entitled to expect a degree of official support.
Similarly, the efforts to address one of the key aspects of the financial crisis – the 'too big to fail' banks – must be applauded. A re-introduction of Glass-Steagall was never going to be on the cards, given the strength of US banks lobbying, but procedures that will allow the safe dismantling and winding down of a huge bank in peril, without causing mayhem in the wider market as the fall of Lehmans did in 2008, must be a big step forward. The concept of moral hazard has to be maintained and this appears to achieve it.
Other measures such as driving more derivatives trades through public exchanges should increase transparency while the requirement for credit ratings agencies to establish internal mechanisms for determining their ratings, to use additional external sources of information and to disclose their methodologies, seems eminently sensible. The promised SEC probe into agencies which for years have suffered from an essential conflict of interest – ie rating the same institutions that pay them – will keep them on their toes.
Of course, any huge regulatory shake-up – especially one that involves setting up new agencies and reshaping responsibilities of existing ones – suffers from the potential danger that teething bureaucratic problems will overshadow and mar what is trying to be achieved.
It is interesting that some are comparing the current US regulatory overhaul with the Sarbanes-Oxley legislation of 2002. That Act, which followed the Enron scandal, was for years demonised by many in the West as the epitome of knee-jerk, excessive over-reaction, which cost business billions to no great purpose. Last month, it even had to survive a concerted legal effort to derail the Act by its opponents.
Yet it is now largely recognised that Sarbox, by requiring senior corporate officers to take personal responsibility for the accuracy of their firms' accounts, has led to increased accountability and transparency. And while it did not prevent the governance and ethical failures among financial institutions that was central to the financial crisis, how much worse might the situation have been without it? Sarbox, together with strict US Federal sentencing guidelines, has had an impact on executive behaviour.
A 2007 survey carried out for ACCA by CFO magazine found that among finance executives in Asia Pacific more than half found that Sarbox was useful to them in helping to establish financial disciplines, processes and internal controls. The fact that everything had to be documented and audited, far from being a burden, was seen as giving the businesses more confidence to focus on growth.
Might it be that opponents of regulatory change simply have to accept that a huge crisis will inevitably mean a major response? Certainly, bureaucratic overload must be contested – and Sarbox's requirements have probably had adverse effects on smaller-listed businesses. But crying wolf and exaggerating the threat to national competitiveness is not helpful.