Unintended consequences of bill will keep lawyers busy with regulatory work. By Andrew Pugh
While financial institutions in the US are reeling from the deluge of legislation about to hit them, regulatory lawyers could be forgiven for rubbing their hands in anticipation.
The wide-ranging reform of financial services first proposed by President Barack Obama last year cleared its last major hurdle on Friday (21 May) when the US Financial Services Bill was passed by the Senate.
While the final version of the bill will be hammered out in the coming weeks, when it is merged with a similar version already approved by the House of representatives the regulation of financial services in the US will undergo the biggest shake-up since the Great Depression.
The impact is far-reaching. Key measures include some banks being forced to spin off their derivatives-dealing operations and the government being handed the power to wind up major financial institutions if they are deemed to pose a risk to the wider economy. Banks are also likely to face stricter capital and liquidity demands.
One of the most controversial elements of the bill is the Volcker Rule, which would see banks that take government deposits forced to spin off their propriety-trading operations and sell their interests in hedge funds and private equity firms. It will also see the creation of a Consumer Financial Protection Bureau to monitor how banks sell mortgages, credit cards and other consumer products.
The legislation will greatly increase the cost of compliance for financial institutions, and the amount that goes toward paying legal bills will not be insignificant. But while bankers may be suffering, it looks like boom time for lawyers.
Most practitioners contacted by The Lawyer believe the measures are overly punitive but also acknowledge that client instructions have grown quickly in the last year – and that this trend can only continue.
White & Case partner Ernest Patrikis, a former general counsel of the Federal Reserve Bank of New York, believes the sheer volume of legislation proposed by the bill will keep regulatory lawyers busy for years to come.
“Over the next 18 months or so we will be presented with a lot of work,” he says. “The bill runs to around 1,400 pages – there’s a lot to get through.”Patrikis also feels the new Consumer Financial Protection Bureau will lead to many firms being forced to beef up their expertise in the area.
Morrison & Foerster banking and finance partner Anna Pinedo has seen a steady increase in instructions since last year. “They [clients] are trying to keep track of what’s going on, both here and in Europe. A lot of resources have been directed by clients toward assessing, monitoring and making preliminary enquiries about the likely implication of any reform.”
Firms such as Debevoise & Plimpton have been restructuring their financial regulation teams for some time.
Paul Lee, the firm’s banking co-chair, says: “We have already integrated our various regulatory functions. We saw from the beginning that the outcome was going to be more comprehensive integration of financial services, and we’ve been involved in that integration process for more than a year.
“This legislation provides for new forms of regulation. There’s going to be a significant amount of work to be done advising clients with new regimes imposed on them.”
Both Lee and Patrikis believe that those in the regulatory sector will be kept busy for at least the next three years by what they describe as the “unintended” consequences of the bill.
There remains a significant amount of uncertainty surrounding much of the proposed legislation, with some claiming the bill has been pushed through so quickly that the wording is not precise enough, and that this in turn will lead to numerous legal disputes.
“The thing that’s important to note is that no one can predict what the ultimate outcomes will be,” adds Lee. “There are 50 or 60 sets of regulation that have to be issued and that involves a huge rule-making process that will go on for years to come. That’s going to be an enormous undertaking for federal agencies.
“Only when we get to that point will we get a sense of how fundamental the changes will be.”
What is clear is that many lawyers are in for a busy and lucrative few years.