• Less Is More or More Is More? Differing Regulatory Ethos in the United States and United Kingdom Pose Challenges for Financial Institutions
  • May 18, 2017 | Authors: Sarah Q. Chaudhry; Meghana D. Shah; Lewis S. Wiener
  • Law Firms: Eversheds Sutherland (US) LLP - New York Office; Eversheds Sutherland (US) LLP - Washington Office; Eversheds Sutherland (US) LLP - New York Office; Eversheds Sutherland (US) LLP - Washington Office
  • The United States is poised to usher in an era of decreased regulation of financial institutions while the trend in the United Kingdom maintains relatively robust regulation of the financial services sector in line with developments since the global financial crisis. The parameters and potential impact of these differing regulatory regimes remain unclear, but present challenges to institutions that operate internationally. Though a great deal of unpredictability permeates these environments, both in the United States and in the United Kingdom, institutions would be remiss to not keep a close watch on and seek counsel regarding how their cross-border activities may be impacted by these developments.

    The Trump Administration (the Administration) has signaled a shift in the regulatory landscape in the United States to one of decreased regulation. The Administration believes that robust regulation, which was partially implemented in response to the regulatory laxness that contributed to the financial crisis of 2008, has negatively impacted the ability of financial institutions to compete domestically as well as globally. While the President has enacted certain Executive Orders outlining a path of decreased regulation, it is unclear how these Executive Orders, which lack the force of law, will actually impact the functioning of financial institutions.

    In addition to such Executive Orders, the President recently issued a series of Presidential Memoranda targeting Dodd-Frank by requiring the Treasury Secretary to assess and report to the President by mid-October as to whether certain provisions of Dodd-Frank comport with the Administration’s drive to ensure that regulation is not inhibiting the proper functioning of financial institutions. However, even these directives from the President, along with House Republicans’ recent introduction of the Financial CHOICE Act of 2017, which aims, among other things, to curtail the powers that regulatory agencies enjoyed under Dodd-Frank, do not allow for an easy assessment as to whether the subject rules and regulations will be eventually changed or repealed. The Administration’s inability, thus far, to actualize on its aspirational goals has moreover created an environment characterized by volatility and unpredictability. 
        
    That being said, what is clear is that the Administration will decrease scrutiny on financial institutions and will likely lessen the regulatory burden on financial institutions. However, such decreased scrutiny may introduce additional problems for cross-border institutions who seek to both avail themselves of decreased regulation in the United States and remain in compliance with the regulatory regime present in the United Kingdom and in which the trend continues to be one of strengthened regulation.

    In contrast to the Administration’s ethos that regulation inhibits growth, the United Kingdom appears to be shifting towards increased regulation as a means of promoting competition and optimal market outcomes. A key example is the Financial Conduct Authority’s Senior Managers and Certification Regime (SMCR), now in place for just over a year and due to be extended beyond just the banking and insurance sectors, in which regulatory approval and oversight is required for individuals performing key functions. By 2018, another important regulatory scheme will be in effect, namely, the Second Markets in Financial Instruments Directive (MiFID II) and the accompanying Regulation on Markets in Financial Instruments and Amending Regulation (MiFIR). MiFID II and MiFIR, collectively MiFID II, seek to provide a European-wide legislative framework for regulating the operation of financial markets in the EU. The primary goals of these reforms are increased transparency of markets, a shift in trading towards more structured marketplaces, and making explicit the costs of trading and investing reforms.

    Given that a substantial amount of financial services regulation has been enacted at the European level, the outcome of Brexit presents an element of unpredictability as to the United Kingdom’s regulatory landscape. The expectation, however, is that much of the EU financial services legislation will continue to apply in order for the United Kingdom to maintain regulatory “equivalence” with the European Union post-Brexit. Accordingly, while Brexit presents a prospect of significant change to the domestic regulatory regime and legislative confusion at Brexit’s implementation, it appears as though the United Kingdom will continue on its path of increased regulation.

    Each nation’s regulatory scheme will affect more than the day-to-day functioning of multinational institutions. Specifically, regulations (or the lack thereof) may impact the way in which such institutions structure their activities based on the differing regulatory environments present in the United States and the United Kingdom. While institutions can and should ensure that they comply with each regulatory regime, this seemingly uncontroversial proposition is complicated by the fact that the contours of the interaction between the United States’ and the United Kingdom’s differing regulatory regimes are still unclear. For instance, cross-border investigations of multinational institutions have become routine matters, but the differing regulatory ethos and rules in the United States and England present issues as to which framework will govern during these investigations.

    It is therefore clear that multinational institutions operating in the United States and the United Kingdom may face unique challenges in ensuring that they are not running afoul of relevant rules and regulations. In this ever-changing regulatory environment, multinational institutions must constantly be assessing what may be required of them in each country. These institutions should also assess what potential issues may arise due to their cross-border activities spanning two (or more) different regulatory frameworks. In order to be best positioned to prevent cross-border regulatory issues, multinational institutions based in the United States and the United Kingdom should be in close contact with trusted advisors who can help them navigate this uncertain terrain.