Tue, Oct 29, 2024
Ahead of what is likely to be a pivotal general election in the U.S., we examine the impact that political changes can have on the regulatory risks faced by regulated entities in various jurisdictions—particularly the U.S., UK and France. Properly managed global businesses routinely monitor and consider the interplay between political mandates and the regulatory environment in which they must operate. We believe the political impact on financial market regulation in mature economies is often overestimated. While not to be ignored, financial markets thrive on transparent, fair, and stable regulations, which boost investor confidence and support sustainable economic growth. Therefore, political administrations should foster a sensible, robust, and transparent regulatory environment aligned with the financial sector in order to achieve national economic goals.
Apex regulators across mature global jurisdictions typically are designed to operate independently of political whim and influence. For example, the SEC is organized as an independent agency of the federal government, and many states (which are themselves independent in the application of state securities laws) have active investigative and enforcement powers as well. While we note that the SEC’s chairperson and commissioners are political appointees, and its annual budget is appropriated not from the fees or monetary penalties it levies, but rather by elected politicians who maintain oversight of the agency’s activities, the agency’s investigative and examination mandates are determined primarily based on the agency’s independent assessment of risks in the marketplace. By comparison, the UK’s Financial Conduct Authority (FCA) is independent and funded by its authorized firms, though its board is appointed by the HM Treasury. France’s banking and insurance supervisor, the Autorité de Contrôle Prudentiel et de Résolution (ACPR), is attached to the Banque de France but is operationally and financially independent of the central bank.
Although exercising budget and oversight powers may provide an avenue to influence the overall priorities of the agency, the fact is that in the U.S., politically driven mandates have little influence on the execution by the line personnel on the day-to-day execution of the SEC’s rulemaking, examination and enforcement mandates. While political changes may be inevitable, the core mission of the agency (investor protection, capital formation, and enforcement) remains unchanged across political administrations.
The tone of regulators can and does change with the political winds. From time to time, we have seen regulators around the world taking a more aggressive tone with the firms they regulate, such as when the previous CEO of the UK’s FCA in 2012 famously said the FCA would “shoot first and ask questions later.” Post financial crisis in the U.S., the SEC pursued for years a “broken windows” theory of enforcement, where the agency charged what some pundits argued were lower-level violations that did not directly result in financial harm to investors. On the flip side, we also often hear politicians bemoaning the effect of over-burdensome regulation on a particular sector with promises of a softer touch on regulation. Such changes in tone often take their cue from political shifts following elections.
A potentially bigger impact on the regulatory environment is the role of the judiciary, which can be influenced by election outcomes and political control over appointment of judges. For example, the U.S. Supreme Court and other federal courts have chipped away at the powers of the SEC’s in-house courts and the deference that federal courts have traditionally given to federal agencies to interpret their own rules with recent rulings that are increasingly sympathetic to plaintiffs who claim violation of various constitutional rights in actions involving federal agencies. A recent decision by a U.S. federal appeals court vacated in its entirety the U.S. SEC’s Private Fund Adviser rules, which had sought to bar preferential treatment, restrict certain activities and enhance transparency of private fund advisers, on the grounds that the SEC had exceeded its regulatory authority. On Oct 21, 2024, the SEC announced its 2025 examination priorities, emphasizing focus on rigorous valuations, commercial real estate, fiduciary duty, cybersecurity and the use of artificial intelligence (AI) for registered investment advisors and broker-dealers. These priorities align with global regulatory trends, reflecting a shared focus on enhancing the transparency, security and integrity of financial markets.
Even as regulatory priorities may alternate with changes in administrations or governments, examination and enforcement aggression has tended to remain constant, and the number of examinations, investigations and enforcement actions tends to increase, as does the amount of monetary and other sanctions. In sum, political administrations may change and geopolitical risk is always on the agenda, but in our view the promise of a lighter enforcement regime is fleeting. SEC enforcement actions, for example, have remained remarkably unaffected (measured by year-over-year increases in both the number of actions filed and the penalties obtained) through both Republican- and Democratic-led administrations—despite at times widely divergent views and approaches on regulation.
One moderating factor against big regulatory swings may be increased interconnectivity and global convergence across advanced economies. Even when the political makeup of governments differs or changes, the regulatory bodies in the larger jurisdictions listen to and take cues from each other much more than they did 30 years ago, in part because of the greater ease of mobility of international capital.
Where there are divergences, navigating regulatory risk becomes even more challenging for multinational companies. One area of recent divergence, which may be further exacerbated depending on the outcome of the 2024 U.S. election, is around environmental, social, and governance (ESG) considerations. In the U.S., the impetus on ESG has been less regulation-driven and more driven by investors, who of late, and partly in response to the culture wars and political polarization, have to some extent de-emphasized ESG factors, at least in their public pronouncements.
In Europe, where a social agenda has long been part of the business DNA regardless of left-right electoral swings, the situation and mindset are very different, with ESG remaining high on the agenda of regulators, business leaders and investors. Multinational companies increasingly must find ways to navigate these divergences, and this is becoming apparent in how they market their ESG credentials differently in some markets than others.
While mindful of potential changes in regulation, most businesses are more concerned about potential electoral impact on other issues, such as interest rates in the U.S., which have remained high for longer than many initially expected. The U.S. Federal Reserve only recently moved to lower rates, a move which itself has become a political issue. In the UK and Europe, where huge budget holes need to be closed, taxes remain a more pressing business concern. We have seen several approaches taken internationally to extract more tax from the financial services sector, including additional levies on bank profits in the UK and financial transaction taxes. The latter continue to be debated globally but have actually been repealed in a number of countries over the past 25 years, including Germany, Japan, the Netherlands and Sweden.
Political shifts will continue to influence the regulatory landscape, especially in jurisdictions like the U.S., UK, and EU. However, the foundational elements of regulatory frameworks—rooted in transparency, consistency and enforcement—remain largely unaffected by electoral cycles. While certain policies or enforcement tones may shift temporarily due to changes in leadership, regulatory bodies tend to operate with a degree of independence from political whims. What remains critical for businesses is their ability to adapt to an evolving regulatory environment while navigating uncertainties. Rather than focusing solely on potential regulatory changes, businesses should prioritize building resilience, ensuring compliance and maintaining flexible strategies that allow them to react swiftly to both anticipated and unexpected shifts in the global regulatory ecosystem. In the end, it is the uncertainty—rather than the regulatory changes themselves—that presents the greatest challenge for businesses operating in today’s interconnected global economy.
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