Compliance and Regulators are under Attack in a War to Dismantle, Downsize, Demoralize, and Destroy… and the Stock Market Loves It

By Jack J. Kelly

In the aftermath of the 2008 financial crisis, there was an angry uprising against Wall Street. It seems that average American get a little upset when fat-cat banksters almost destroy the global economy, crash the stock market, crush the job market, and destroy everyone’s 401ks (the gallows humor joke at the time was that ‘my retirement 401k plan is now a 201k’).

Thousands of people, who had nothing to do with the bad behavior that led up to the devastation of the financial crisis, lost a significant portion of their investments, retirement monies, and their jobs. Politicians, members of the media, regulators, as well as everyone else wanted the banks and Wall Street to be held accountable for their egregious actions. Everyone united together in their demands for new laws and oversight to be put in place to prevent another crisis in the future.

New rules and regulations, such as Dodd Frank, were eventually enacted; regulators and law enforcement became increasingly more aggressive and stricter. Banks were fined billions of dollars, and thousands of Compliance, Legal, Risk, Audit, Anti-Money Laundering and related professionals were hired to ensure that the banks followed the new rules.

It was not just the banking and financial industry that became highly regulated. The sour mood toward the financial industry turned into a stricter (many business people would use stronger adjectives such as ‘draconian’) oversight of corporations in all types of industries. Executives would complain that there were too many regulations, and their companies were incurring enormous costs, and held back from burgeoning by cumbersome rules and potential fines and penalties. CEOs asserted that they were held prisoner by armies of regulators.

Fast forward to today, it is all quickly changing. There is now an all out assault against Compliance, Regulators and Regulations.

Here are just some of the examples:

The hand-picked successor to lead the Consumer Financial Bureau (CFPB) by the departing head of the agency was capriciously dethroned by a person appointed by President Trump. This new pick is on record for stating that he is diametrically opposed to the CFPB, and it should be shut down. I’m not an expert in these matters, but I would imagine if you cared about a regulatory body you would install someone who believes in the cause and not interested in tearing it down (but that’s just me).

Similarly, the appointment of heads of other government agencies, such as the Environmental Protection Agency, Department of Education, Department of Energy, and the Securities and Exchange Commission raise certain questions about the people in charge. This is not an indictment of the quality or character of these people, it’s just that they don’t seem to possess the enthusiasm, excitement, and passion to uphold the mandates of the organizations they run. It’s like a nice resume-building job and good networking gig, which will ultimately lead to a big payday once they leave the government. Being a recruiter whose job it is to take someone from one job and place them in a better, more advantageous and well-paying position, it would be hypocritical to knock their motives, but it doesn’t seem fair or right.

Compliance professionals have been downsized at an unprecedented rate, especially well-compensated, senior- level personnel. This is unusual in that Compliance departments are generally run lean and understaffed. It is the equivalent of a city letting go of police and firemen, while there is crime and unrest; it generally doesn’t happen.

Compliance positions are being relocated to lower-cost areas where they could hire younger, cheaper, less-experienced workers. Clearly, the work product of a 22-year-old will not compare to a 46-year-old with 20-plus years of relevant experience.

Companies are dragging their feet in the hiring of Compliance in the hopes that they will not need to eventually hire them. Offers being made to Compliance are lackluster, illustrating that they are not being valued as they used to be.

There has always been an anti-Compliance sentiment, and executives and management are only too happy to have the opportunity to slash their budgets and personnel. Banks and other non-financial corporations are generally in a belt-tightening, cost-cutting mode. It is very convenient for them to use this opportunity to cut back on Compliance expenditures such as employees, technology, and outside vendors, such as Management Consultants. Also, it seems that a large number of cases emanating for the financial crisis have already been settled and corporate executives feel the perceived heat is off. It is sad to see.

I think that there is also another reason for this sudden change. I would like to take credit for the idea; however, I stole it from a Stock Broker who works next door to my offices. The broker, a dapper gentleman who looks prosperous and in his mid-60’s, is a sharp guy who has seen it all. His take is that the deregulation movement for all industries is a big contributor to the record-setting stock market run. As of the beginning of this month, on the one-year anniversary of Donald Trump’s presidential win, the Dow Jones Industrial Average advanced 28.50%. That is huge, and represents the best performance after a White House victory since 1945. In the following weeks, the market has since advanced even higher (I was too lazy to calculate the percentages, but I’m pretty sure it’s higher).

His theory is that companies will save multi-millions of dollars with deregulation. Older, more-experienced Compliance, Legal, Risk, Audit and related professionals will be (and are) downsized in large numbers. They will not be replaced either. Costs are saved when the mid-level jobs are moved to cheaper locations.

More importantly, the broker contends, during the post-financial crisis years, many companies were over-regulated, mired in red tape, and internally run by Legal. When a company is run by lawyers and regulators they become timid, fearful, and avoid taking risks. It becomes impossible to get anything accomplished out of fear of invoking the wrath of regulators. When the lawyers and regulators are removed, and the fear of regulatory retribution is gone, companies take on additional risks, and revenue and profits skyrocket. The stock market is hitting new highs every day, in part, based on the anticipation of continued deregulation, and the accompanying expectations of unbridled growth.

However, there is a downside. Ask any person with 15-plus years of experience, and they will tell you this will be a sugar high. The companies will push the envelope, make more money, but there they will eventually cross the line without proper supervision. The transgressions may not surface for years, but nobody cares. Trump can point to the great stock market, and congratulate himself in a Tweet. CEOs will get enormously rich with stock awards and large bonuses. By the time the problems surface and are noticed, they will be long gone and we will be left paying the bill.