US deregulation by job cuts limits legal challenges, increases uncertainty

The US administration of Donald Trump has found a way to sidestep the time-consuming process of changing rules to curb what it sees as burdensome government regulations — namely, cutting jobs. Defunding and de-staffing is quicker than legislation or policy change, but it is unclear whether reducing costs in this way will yield the desired long-term deregulatory effects.

Job cuts are moving ahead with entire agencies being shuttered, such as the Consumer Financial Protection Bureau (CFPB). This has led to legal challenges, which experts say leave regulated firms facing years of uncertainty as lawsuits wind their way through courts. The Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank’s regulatory arm are now experiencing the administration’s cost-cutting and deregulatory process. Some 170 probationary employees at the FDIC have been fired, according to Bloomberg Law. The Office of the Comptroller of the Currency (OCC) has also lost about 76 staff.

Losing contacts

For banking and finance firms, who allocate investments based on risk factors, the biggest immediate threat may come from losing the government agencies that anchor the financial system. Agency employees who answered questions and served as firms’ points of contact are gone. And while the courts have stopped numerous executive orders, in many other cases judges have put aside pleas for temporary restraining orders, to reduce disruption. Full hearings on the merits of the latter cases could take months.

By the time final rulings are issued the changes will be difficult, if not impossible, to reverse. For the moment, the clearing of large tracts of the regulatory landscape has created an unprecedented challenge for banking and finance risk and control. Firms are struggling to create flexible strategies for different scenarios.

“Until there are rules or a process is in place, there isn’t much firms can do. You can’t base your compliance programmes on tweets,” said Jay Gould, a special counsel at law firm Baker Botts in San Francisco. “The Trump team inevitably will have to create a process and then people will have to see what that looks like. Until that happens firms will need to do what they have always done: comply with what’s on the books and figure out where the risks are.”

New administrations have always meant changes in the regulatory regime, sometimes extreme shifts. But “this is markedly different from past crash deregulations by both political parties”, Gould said.

Strategy change  

President Trumpʼs first-term executive order calling on US regulatory agencies to eliminate two rules for every new one issued had little effect. His second-term strategy of eliminating entire agencies and departments is, however, being felt.

“They want impact — and it’s hard to point to the impact of withdrawing a regulation,” a former Federal Reserve economist, who asked for his name to be withheld, said in an interview. “They started with a dual purpose of cutting regulations and saving money. The dollar metric had to win out. The idea is to move fast and that’s the quickest way to get a result. Changing regulations takes time.

“But what are dollar savings without structural change? I donʼt know,” said the former official, who still works on some programmes. “You don’t have a clear idea of what it is they’re trying to achieve if you are just counting dollars. It’s a very quick and easy thing to measure but it may not have anything to do with the underlying frictions that are causing inefficiencies.”

The numerous lawsuits challenging the administration’s downsizing efforts, on constitutional grounds of separation of powers, have met with mixed success.  The administration has evaded some challenges by avoiding legally tenuous claims that the president’s executive powers allow him to exert authority over independent agencies, said Scott Anderson, a Columbia University law professor and a fellow at Brookings Institution, in a Lawfare webcast.

“The government has represented there are normal contract terms that allow for suspensions and terminations in certain cases,” Anderson said.

While it has hedged its position in court by de-emphasising executive orders, the administration has asserted that it has the power to issue such edicts. In a February 18 executive order, “Ensuring a government that answers to the people”, Trump said his office “will interpret the law for the executive branch, instead of having separate agencies adopt conflicting interpretations”. The president said his power extended to independent agencies such as the SEC and the Federal Trade Commission.

Past presidents have claimed power to review agency decisions by requiring rules to be sent to a division of the president’s Office of Management and Budget, the Office of Information and Regulatory Affairs (OIRA). But Trump is the first to require “independent agencies” to submit. He has asserted a legal right to fire the heads of agencies and, more controversially, the inspectors general — the watchdogs tasked with preventing fraud and abuse of power — at 17 agencies.

Enormous power

The potential for a president to move through the bureaucracy at will has always been there. The sweeping changes seen thus far show that “the president has pretty much enormous power”, said Lawfare senior editor Roger Parloff, in the webcast.

While the legal challenges could succeed over time, reversing the steamroller is unlikely to undo the deconstruction of agencies that has already taken place, say regulatory experts. The CFPB — the first target of Elon Muskʼs Department of Government Efficiency (DOGE) — has ceased enforcement actions and rule implementations. The home page of its website, until recently one of the most robust agency destinations for logging complaints and disseminating information, carries a “Page Not Found” message and an image of a plug pulled out of its socket.

Democrats have accused the Trump administration of illegally curbing the CFPB’s congressionally mandated activities, and inappropriately exposing large volumes of personal and proprietary data to unknown viewers. Democratic advocacy group The American Prospect said Republicans have invoked the Congressional Review Act, which can be used to rescind recently passed rules, to prevent a regulation putting digital payments under the CFPBʼs supervision. While Big Tech firms fought the rule, traditional banks welcomed the oversight of unregulated competition.

“Republicans are primarily focused on boosting Musk and other Big Tech CEOs as they enter digital payment markets, determined to make managing and transferring money a regulatory-free zone,” argued The American Prospect.

Under scrutiny

The CFPB is just the first of many agencies to be rolled up or severely cut back by DOGE. The SEC, and the powerful bank regulators in the Treasury Department, including the FDIC and the Federal Reserve’s regulatory arm, are now experiencing the same scrutiny. That too could change. On February 27, a federal judge ruled the Office of Personnel Management’s move to fire hundreds of probationary federal workers was probably illegal, The Washington Post reported.

In the near term, the largest and most technologically sophisticated firms are likely to gain competitive advantage over smaller players.  The agency personnel that firms have long relied on to answer compliance questions may be gone, or unable to respond. With so much in flux in sensitive areas such as Russia sanctions, firms will be left adrift.