Playing by Rules Costs Wall Street Extra 51 Million Hours a Year

To hear Jamie Dimon tell it, which he does quite often, US financial regulations are out of control.

“It has been taken to a whole new level by people who really like it and want even more of it,” Dimon, JPMorgan Chase & Co.’s chief executive, told shareholders in May.He’s called some of what regulators do “completely asinine” and labeled measures that were intended to prevent the next financial crisis “a waste of time,” occasionally tossing in diagrams of overlapping rules or an expletive for good measure.

As head of the biggest US lender, Dimon is the most prominent among a wave of bankers, investment managers and hedge fund bosses who’ve been urging officials for years to revisit the trade-off between the cost of rulemaking and the benefit of safeguarding the financial system. This time, momentum is on their side. The Trump administration has mandated 10 rules be cut for every new one put in place, and given the public 90 days to comment on which financial regulations are so outdated or burdensome that they ought to be scrapped. One entire agency, the Consumer Financial Protection Bureau, has already been gutted.

The question, among those advocating a cautious approach, is whether wholesale hacking away at rules drawn up after past crises might lead to a new round of convulsions.

A rally outside the US Consumer Financial Protection Bureau in February as it was being dismantled.

Photographer: Stefani Reynolds/Bloomberg

The peril is tricky to measure — it’s hard to put a price on meltdowns that never happen, investors who aren’t misled by shaky companies or consumers who aren’t cheated into personal ruin.

It’s possible, though, to get a ballpark idea of the rising workload, based ironically on the Paperwork Reduction Act, a law that requires new rules to include estimates of the hours of work created if the task includes collecting data.

Add those all up, and it theoretically looks like a net 51 million hours of extra annual paperwork from rules introduced since the Great Financial Crisis.

Keeping Busy

That’s according to an analysis by Bloomberg News, which sorted through 218 disclosures of new, finalized financial regulations filed with the Office of Management and Budget during that span. Combined with rules already in place, this brought the tally of annual paperwork to 425 million hours. Back-of-the-envelope math suggests the additional tasks might be enough to keep about 26,500 full-time workers busy all year.

Most of the new regulations were spurred by the US Securities and Exchange Commission, which required action on everything from fund disclosures to fees and blank-check companies. The impact sometimes dissipates in later years or gets challenged in court, but rules that were among the most time-consuming in their initial stage included about 16 million hours for brokers to disclose conflicts of interest and to develop a code of conduct, and 4 million hours in an edict designed to curb abusive forms of short selling. Disclosures on liquidity and leverage affecting about 6,000 investment firms accounted for more than 524,000 hours.

Sheila Bair

Photographer: Ting Shen/Bloomberg

“That’s unfortunate; we have too many regulations,” said Sheila Bair, the Federal Deposit Insurance Corp.’s former chair and an architect of post-crisis rules. “Keeping the system stable arguably has infinite benefit,” Bair said in an interview. “But in many cases, the marginal benefit doesn’t justify the additional cost.” While she remains a vocal opponent of lowering standards, Bair said plenty of the rules “are overly complex and not very effective.”

There are already signs that the uptick in compliance work is set to slow. The SEC has pushed off the effective dates of looming requirements for hedge funds and signaled it may roll back other Biden-era rules. The industry has also recently won major reprieves in court.

Many of the post-crisis rules were mandated by lawmakers when they passed the Dodd-Frank Act, a sweeping piece of legislation enacted after the 2008 crisis whose measures included creating a consumer protection agency, ramping up derivatives regulation, adding restrictions on trading and giving the Federal Reserve more oversight powers.

Fickle Figures

Before anyone takes these figures at face value, some caveats: First of all, not all regulations translate into new burdens — some list their costs as “zero” — and the numbers aren’t uniform. A 2018 Government Accountability Office report on non-financial industry regulators found they used differing methods for making their estimates.

To some executives and regulators, this casts doubt on how precise the numbers might be. The GAO found some were based merely on “professional judgment” with no outside data from the real world.

“I used to beg firms for input,” says Bobby Bean, an adviser at Forvis Mazars who spent over 30 years at the FDIC. One reason: Bankers didn’t want sensitive operational information to become public, he said.

There are a lot of other moving parts. The GAO found estimates could be off by millions of hours or hundreds of millions of dollars because of math errors. Indeed, Bloomberg’s study identified at least 37 instances where agencies updated initial estimates because they discovered a typo or rounding error, or forgot to remove the setup costs after that phase had long passed. In some cases, estimates could have been affected because rules were phased in or never fully implemented. Firms might also claim higher hourly burdens to make a case for rollbacks.

Jamie Dimon

Photographer: Al Drago/Bloomberg

Another issue: If activity declines, the total hourly burden for things like transaction reporting drops. High initial cost of setting up compliance can also be misleading. In response to the 2008 mortgage crisis, regulators required loan agents to register with the federal government, a rule that covered more than 400,000 agents and mortgage lenders and initially took 5 million hours a year to set up. More than a decade later, the paperwork burden dropped to one-tenth the original figure.

Even if the estimates aren’t accurate to the last hour, the trend is clear. The Bank Policy Institute surveyed members and found that from 2016 to 2023, employee hours spent on various compliance tasks jumped 61%.

Representatives for the FDIC, Federal Reserve and Commodity Futures Trading Commission all declined to comment for this article; the CFPB didn’t respond to messages. The SEC pointed to June 3 testimony from Chairman Paul Atkins, who said “clear rules of the road benefit all market participants.”

The Office of the Comptroller of the Currency said its paperwork estimates are compiled from public sources, OCC experts and public comments, and that several of its most burdensome rules are joint efforts with other agencies.

Zero Chance

No one has suggested that removing all of the rules is a good idea, or a likely outcome, given the crises that rip through the financial world from time to time and the trillions it can cost to resolve them. Even Citadel Securities founder Ken Griffin, a vocal proponent of deregulation, has described the prize as stopping what he called the deluge of new rules.

Defenders of the system say there’s a cyclical nature to regulation followed by deregulation as turmoil fades from memory. They’ll concede that complying with rules can be a time-suck, but so was the gargantuan cleanup of the mess left by the Great Financial Crisis.

“This is a dangerous game,” SEC Commissioner Caroline Crenshaw said in a May speech. “We are pulling apart our own regulatory foundation — block by block, case by case, and rule by rule,” she said. “If we continue down this path, eventually the carefully constructed tower of regulatory blocks will tumble — leaving the door open to the same types of misconduct that we have spent decades eradicating.”

Caroline Crenshaw

Photographer: Ting Shen/Bloomberg

Nationally, Americans spend 3.2% of total working hours complying with federal rules, according to a study on the intensity of regulations. The benefit is much harder to measure, said Joseph Kalmenovitz, a finance professor at the University of Rochester who authored the study.

In aviation, for instance, “how do you measure the benefit of a regulation that decreases the chance of a plane crash by even just one percent?” Kalmenovitz said.

Despite the current drumbeat, regulations have a way of becoming sticky, especially if industries lobbied for them in the first place to level the playing field, or to stymie startup rivals. Besides, financial firms might still do some of the work for their own reasons.

“Even if the rules are entirely repealed, it’s not like the firms will stop collecting data for their own customers and investors,” says John Coates, a Harvard professor who has closely studied the costs and benefits of regulations.

Big Targets

The biggest burden measured in hours came from the SEC, which crafted rules during the Biden administration to add transparency in public markets, and curb risks at hedge funds and private markets. Atkins has indicated he might seek less information because he doesn’t see those risks as systemic.

Another target is executive compensation filings, which have fueled controversies about pay-for-performance and the huge gaps with other employees. Atkins in June said it’s “a Frankenstein patchwork of rules” after three decades of updates that investors find hard to grasp.

Critics have also lamented the “Names Rule” for funds with buzzwords in their titles like ESG. The SEC at first reckoned that curbs on such labels — to ensure clients get a clearer understanding of where their money is going — could apply to about 10,000 funds with initial costs of $50,000 to $500,000 each. The agency has since said costs would be toward the lower end, but the Investment Company Institute trade association is skeptical and has organized about 400 people from the industry to study the matter.

In banking, Aaron Klein of the Brookings Institution cites anti-money laundering as a standout burden. “Most smaller institutions I talk to say they spend more time on anti-money laundering regulations and know-your-customer than they do on bank capital,” Klein said. Financial crime compliance cost more than $60 billion a year for North American financial institutions alone, according to a 2023 reportby Forrester Consulting for LexisNexis Risk Solutions.

Gene Grant II, who’s buying a community lender in Illinois with plans to make it crypto-friendly, contends regulators have unfairly deputized banks for law enforcement. “I don’t know what the solution should be,” Grant said. “I don’t think it should be banks.”

A diagram used repeatedly by Jamie Dimon in his shareholder letter to explain his view that overlapping regulations have created a complex burden on the financial industry.

Source: JPMorgan

Piling Up

Another gripe is that rules get piled on top of each other with little thought about the interactions and the cumulative burden. Jamie Peterson, managing director of regulatory consultancy Iron Road Partners, says some agencies ask for very similar data in different formats. The reporting obligations by the SEC and CFTC on hedge funds and commodity pool operators, for example, have significant overlap, he said.

For now, the industry likely will make some progress with a political regime that favors deregulation — assuming a new market convulsion doesn’t emerge.

“Regulatory cycles shift with political changes and market stability,” said Igor Rozenblit, Iron Roads managing partner and a former SEC attorney. “While the next major political inflection point is 2028, a market crisis could reverse that trajectory and we could return to tighter regulation sooner.”

--With assistance from Yizhu Wang, Lydia Beyoud and Silla Brush.

To contact the authors of this story:
Laura Noonan in London at lnoonan6@bloomberg.net

Weihua Li in New York at wli823@bloomberg.net

To contact the editor responsible for this story:
Rick Green at rgreen18@bloomberg.net

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