Deloitte: Dodd-Frank Law Still Lacks Clarity After Two Years

Source: Source: BestWire | Published on August 1, 2012

DeloitteTwo years after the Dodd-Frank financial reform law went into effect, many aspects of it are still unclear because few regulations have been issued. But that doesn't mean businesses shouldn't be working to better prepare their risk management programs to ensure that the company will comply with the law going forward.

That was the consensus of a group of Deloitte & Touche LLP financial experts during a July 31 conference call on the Dodd-Frank Act.

Chris Spoth, a director at Deloitte, said new rules are forcing financial institutions to integrate their business strategies and the new expectations required under Dodd-Frank. Spoth said that would likely require companies to put a new focus on their operating and business models to enhance internal efficiencies.

Insurance companies are closely following implementation of the Dodd-Frank Act, given the far-reaching effects it will have on the financial marketplace. It could have a direct impact on the insurance industry, prompting insurers to pressure Congress to cut several provisions of Dodd-Frank they said could duplicate existing regulations (Best's News Service, April 30, 2012).

"No matter how well businesses are performing today, without an advanced approach to risk management there is the potential to erase gains from any part of the business," Spoth said.

To avoid problems, companies should ensure top corporate officials, including the chief executive officer and the chief risk officer, are informed of potential risks.

Companies should also view stress tests and risk analysis, not as a way to simply comply with regulations, but as a way to truly improve their financial standing, Spoth said. That includes a focus on consumer complaints and on creating a corporate structure that has a culture that better manages and mitigates risk.

There are also questions surrounding the Volcker Rule, which bars financial institutions from making certain kinds of speculative investments that do not benefit their customers. The insurance industry, particularly in the life sector, have called for more clarity on how the rule would affect their investments.

Kim Olson, a Deloitte principal, said the rule has not set a "bright-line standard" for which types of investments are acceptable under the rule and which are not.

Among the investments specifically barred under the rule are using the company's capital to assume principal risk with the intention of benefitting from near-term price movements and activities posing a threat to the stability of the U.S. financial system.

However, the rule makes exceptions for several types of trades, including hedging, market making and underwriting. Olson said it is often unclear whether a specific trade would fall onto the list of prohibited activities.

To date, more than 19,000 comment letters have been submitted to the Treasury Department and Congress on the Volcker Rule, Olson said.

Earlier this year, the U.S. Securities and Exchange Commission said it was weighing industry calls to exempt insurance companies from the Volcker Rule.

Industry trade organizations argue that unless the exemption is granted, insurers could face severe financial pressures because many companies invest in hedge funds as a way to bolster their solvency and their ability to pay claims.