Depending on who you speak to about the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), you will hear drastically different opinions. On the one hand, politicians and regulators, consumers, and some business owners will agree that Dodd-Frank was a critical component of correcting the issues that led to the Financial Crisis and Great Recession. On the other hand, credit grantors such as banks and credit unions, and some business owners and consumers will concur that Dodd-Frank went too far and it damaged productivity and growth potential for a number of industries. Regardless of your stance on Dodd-Frank, everyone should be well aware that the Trump administration is looking to drastically scale back these regulations, which will have both positive and negative impacts on U.S. credit grantors, middle-market companies and consumers, and the outsourced business services (OBS) industry as a whole.
The recent article titled Dodd-Frank potential dismantle may lead banks back to M&A on Mergers & Acquisitions speaks to increased M&A activity within the financial services sector. In fact, several banking executives such as BB&T’s chief executive Kelly King went so far as to say that they were “excited about the changes on the horizon with the new administration”. One of the areas that appears most appealing to many in the financial services sector is the increased potential for expanding acquisitions into specialty financial services and middle-market lending, as well as consolidation in general.
Consolidation within the financial services industry has been pretty consistent year-over-year for the last 20 years so the dismantling of Dodd-Frank may increase this trend significantly over the course of the next four years. Interestingly enough, one of the major drivers for consolidation since 2010 was the increased costs associated with compliance. With compliance costs and barriers, perhaps, going away, the new driver for consolidation is the increased level of working capital available to these same financial institutions. This raises the question of what increased M&A activity among credit grantors will mean for consumers and middle-market companies in general and OBS industry members who work with credit grantors. In our opinion, the results will surely be mixed, but they may end up hurting, rather than helping, these two groups.
From the consumer or middle-market business perspective, we can assume that a Dodd-Frank reduction would lead to, among other things, fewer lenders for these groups due to consolidation, potentially riskier lending practices to these groups due to decreased lending standards, and fewer regulations around financial services activities in general. For example, individuals would be at risk if the Obama-era rule requiring brokers to act in their clients’ best interests as opposed to the highest profits for themselves were to change as proposed by President Trump. Additionally, if specialty financial services companies such as auto and equipment financiers were to merge with larger commercial banks, then the middle-market companies that rely on these institutions may find fewer desirable terms and options available to them as consolidation continues to take place.
We would like to believe that lower regulatory levels would be great for OBS companies since they were particularly beaten up by the stricter post-recession regulations and this move would probably reduce their costs of compliance. However, that appears unlikely. Financial institutions have already invested heavily in compliance operations and limited their vendor networks to companies with the strongest compliance systems, so there is skepticism that this will substantially change going forward. Furthermore, the predicted consolidation among these clients, as mentioned previously, will inevitably lead to winners and losers among OBS vendors, which may necessitate increased levels of OBS M&A activities to better align with the trends within their client’s’ industries.
While the effects associated with scaling back Dodd-Frank will undoubtedly lead to some positives and negatives for the U.S. economy, financial services industry, consumers and middle-market companies, and OBS providers, overall, there appears to be greater risks than rewards for everyone involved, except for the financial institutions and other credit grantor entities. Therefore, scaling back Dodd-Frank requires careful analysis of the individual regulations and assessing whether or not it truly is in everyone’s best interest that a particular component of the regulation be eliminated.
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