Article Preview - The Financial CHOICE Bill and Credit Rating Agencies: Regulatory Amnesia

Today’s post previews the third article this week, one which analyses the recently proposed ‘Financial CHOICE Act’ in the U.S., particularly by way of assessing its proposed regulation for the credit rating industry. The article, entitled ‘The Financial CHOICE Bill and the Regulation of Credit Rating Agencies: Opening the Gates for the Gatekeeper’, is to be published in Financial Regulation International and is available here in its pre-published form. For this post, the aim will be to preview the article and provide some critical analysis of the bill, all from within the parameters of understanding that the Bill represents, quite clearly, the ethos of what this author calls ‘regulatory amnesia’.

The ‘Financial CHOICE Act’, with ‘CHOICE’ being an acronym of ‘Create Hope and Opportunity for Investors, Consumers, and Entrepreneurs’, is a remarkable proposal that is currently at the Bill stage in the development of American legislation, with it recently moving past the House Financial Services Committee stage (after amendments) with a vote of 34-26 to the full House of Representatives (potentially around August). The Bill, which seeks to repeal a number of elements from the Dodd-Frank Act of 2010, is the brainchild of a small number of Republican Representatives, led by Jeb Hansarling. The proposed Act seeks to do a number of things, with a few gaining the majority of the headlines. Firstly, it proposes to repeal the ‘Orderly Liquidation Authority’, which allows the Government to step in and provide liquidity (via so-called ‘quantitative easing’), in order to eliminate, supposedly, ‘too big to fail’. It then goes on to proclaim that bank testing procedures should be altered, so that systemically important banking institutions need only be tested every two years, as opposed to every year now. It proposes that the cap on the amount that banks can charge retailers for processing credit and debit card fees should be lifted – something which is being vociferously opposed even at this early stage – whilst it also aims to, rather incredibly, weaken the Consumer Financial Protection Bureau which would see its role reduced and also its independent status substantially altered. We will come back to some of these issues shortly, because the Act does have support from a number of different sectors; yet, for us, we shall concentrate on the proposed regulation of the credit rating agencies.

The article discusses the proposed regulation of the agencies in the Act, and concentrates upon four specific sections which stand out in this regard. The article discusses these in more detail, of course, but section 852 seeks to remove the mandatory requirement for agencies to state how they will release information regarding their methodologies – the obvious lack of stated oversight essentially removes this requirement. Section 853 removes the requirement that the agency’s CEO attest to the integrity of the internal controls within their agency, whilst simultaneously removing the requirement to disclose whether the rating was, or could have been affecting by any ‘business activities’. Section 856 removes the firewalls between the marketing and rating divisions of an agency – which, to pause for a moment, is a quite frankly ludicrous proposal – and section 857 removes a number of Dodd-Frank elements in one foul swoop, including the need to prove ‘state of mind’ – something which recently resulted in S&P and Moody’s being unable to manoeuvre away from their guilt -, the requirement to look at alternative models – thus cementing issuer-pays – and finally the Act brings back the exemption of ‘expert liability’ to protect the agencies from litigation. This author, in almost every piece written, argues that we must focus on the agencies as they actually operate, and not how we would like them to, and in that sense it is not a difficult endeavour whatsoever. The U.S. Senate, in an extensive investigation, published a 600+ page document shortly after the Financial Crisis in which the agencies were found to be fundamentally central to the Crisis. The two recent fines levied by the U.S. Department of Justice against the Big Two, totalling over $2 billion (as discussed earlier here in Financial Regulation Matters), detail the agencies’ failings and suggest, overwhelmingly, that the agencies consciously act against everyone for profit and protection. This proof is not something to discard, or downplay – it is evidence of criminality. With that in mind, the proposals included in the Financial CHOICE Act are not only reckless, but actively threaten the American (and, by default, the Global) society.

There are a number of calls within the media, and some official bodies, that support the Act. The Congressional Budget Office recently suggested that the Act, if enacted, would reduce the federal deficit by $24 billion over a 10-year period. Others have suggested that ‘the reality, however, is that the current financial regulatory system isn’t working’. Both of these viewpoints miss the point entirely, and it is vital that we detach ourselves from the poisonous and short-sighted allegiance to political ‘wings’ in order to survey the situation accurately. If the system isn’t working, it is not because of inefficient regulation, but because just ten very short years ago the financial elite conspired to pilfer the resources of society on a systemic scale. The Act may reduce the federal deficit by $24 billion, a deficit that currently stands at over $500 billion, but at what cost – at placing a bet with the safety of American citizens on the decency of the financial sector? This proposed Act is truly the epitome of short-sightedness, and if it were to be enacted would become to historical posterchild of the concept of ‘regulatory amnesia’. Ultimately, it is vital that political party ideologies are removed when something so important is at stake – the response to the proposed Act suggests that the reality is exactly the opposite.