Navigating the Global Regulatory Maze in 2017: A Q&A With Duff & Phelps' Rosemary Fanelli

A recent survey of nearly 200 senior financial services professionals revealed that many believe financial regulation has done little or nothing to improve stability in the financial services market. Regulations are increasing costs, and compliance spending at a typical firm is expected to double in the next five years. FEI Daily spoke with Rosemary Fanelli, Managing Director and Chief Regulatory Strategist for Compliance Consulting at Duff & Phelps, about Trump’s two-for-one rule on regulations, Brexit, and the cost of compliance.

FEI Daily: Tell me about The Global Regulatory Outlook and what surprised you about the results. What did not surprise you?

Rosemary Fanelli: The Global Regulatory Outlook is a cornerstone publication within the Compliance and Regulatory Consulting division of Duff & Phelps. We sent it to a number of C-level executives in the financial industry, primarily hedge funds and private equity firms, as well as bank executives, investment banks and broker-dealers. We had over 180 respondents globally, over 40 percent of whom were in the United States, with the remainder in the UK as well as Asia.

What most surprised us, to be frank, is that the readers and subscribers said the financial industry right now is over-regulated and the rules are unclear and unworkable. Many were – and still are --unsure as to how the regulations that were implemented post Dodd-Frank  affect them.

For example, with respect to cybersecurity, the SEC has said you need to do X, but many managers are still confused as to what X means. To further the uncertainty,  we are going to have a new head of the SEC and Trump’s approach to financial regulation in general is a question mark. What does that mean for smaller firms, whether they’re broker-dealers, hedge funds, or even larger firms and the banks?

Another thing that was quite interesting was that notwithstanding the uncertainty – or perhaps because of it – many managers expect to spend more on their compliance programs. It’s interesting to see this confluence of events, participants  being uncertain about how regulation will affect them going forward, but at the same time realizing and acknowledging that that  they’re going to have to spend more on the compliance function.

FEI Daily: 35% of respondents believe financial regulation has done little or nothing to improve stability in the financial services market. In speaking with survey respondents and financial services professionals, what do they want to see happen to build stability and avoid another financial crash?

Fanelli: There seems to be this thought within the financial industry that the SEC is able to come out with rules, but not clarify what they actually mean. The SEC can say that cybersecurity is a priority and that there are many things that managers need to do, but if managers don’t know the specifics, and they’re spending six figures on cybersecurity the feeling from  managers is ‘yes, there’s more regulation, but I don’t know that it’s helping me or anyone else if there’s no level of specificity in terms of what we’re supposed to be doing.’

On the regulators’ side, it’s rare for a regulator to give you a roadmap and say this is exactly what you need to do and when you need to do it – that would be impossible given the diverse business models and investment strategies in the industry.   So, some greater level of certainty regarding regulatory goals would allow firms to operate more efficiently and build market stability.

FEI Daily:  Trump says he plans to implement a two-for-one rule on regulations. What’s the reaction that you’re hearings from executives?

Fanelli: The reaction that we’ve mostly been hearing is one of ‘wait and see.’ In general, there’s a positive reaction, even for those of us on the service side. The reason why I think the reaction we’re getting from the industry is ‘wait and see’ is because it’s really not that easy. The process of repealing a rule has to follow the same process as adopting a new rule, so there has to be a notice issued, a comment period provided and regulatory evaluation of the comments.

Given that, plus given the fact that there are certain practices that are expected by institutional investors, such as disclosures, registration, and having a formal compliance program, it is hard to see anything changing anytime soon.  There is simply a lot that needs to be fleshed out.

FEI Daily: What are executives expecting from Trump when it comes to regulations? How do they anticipate regulations impacting their businesses in 2017? 

Fanelli: What many are asking us about is changes in the tax treatment. The two-for-one’s going to take some time, what are we going to repeal, what are we not going to repeal, are the Dodd-Frank rollbacks really going to materially affect us in the investment fund world, is it really going to be geared towards the community banks, is it going to address too big to fail? But the question that is on everybody’s lips and the one that Trump has said he wants to push forward is a revision of the tax code, and one of the things that is on the table there is taxation of the incentive fee, which is something the President has said should happen. If this  happens, but there may be a corollary reduction in the capital gains rate to stimulate capital investments.

FEI Daily: Why do professionals believe regulations will increase costs in 2017?

Fanelli: Managers said they expect to spend more in 2017, because of the level of global uncertainty: Brexit is happening, and market participants  expect there to be less regulation with Trump, but they still expect to spend more on their compliance program. If This is so for many reasons: for example, if I am  a manager based in the U.S. and I have an office in London, I’m going to be interested in whether my compliance program obligations will be impacted by seceding from the European union.

Even if President Trump does roll back all the rules, and if Dodd-Frank evaporates tomorrow, that’s not something that leads me to say I’m not going to spend money on my compliance program.

You’re going to have to pay your advisors and your lawyers more to follow the changes. Also, certain practices are now market expectations and we will not be able to “unscramble the eggs”. It is hard to imagine institutional investors agreeing to accept less information and less disclosure because of a relaxation of regulatory obligations.