Game-changing policy shifts will transform the financial landscape for institutions, insurers and advisors

Tax cuts, tariffs and deregulation present both opportunities and challenges for the financial services industry. This article will explore tax policy changes, tariff impacts, deregulation opportunities, and credit union changes. Smart financial institutions, insurance companies and registered investment advisors are already positioning themselves to capitalize on these policy shifts while mitigating potential risks.

As President Trump moves forward with tax, trade and regulatory policy changes, the financial services industry should be prepared to seize opportunities and recalibrate for possible risks. Changes could present exciting opportunities for new investment, as well as some shifts that could require strategic adaptation.

Here are some key initiatives to watch.

Tax cuts and the carried interest loophole

Extending the 2017 tax cuts

The Trump administration is pushing to solidify the tax cuts introduced in the 2017 Tax Cuts and Jobs Act (TCJA). Unless Congress extends or modifies the law, most of the TCJA’s provisions are set to expire on December 31, 2025.

An extension would maintain lower corporate tax rates (21% versus 35%) and support higher corporate profits, potentially boosting stock market performance. For banks and financial institutions, maintaining a lower corporate tax rate could mean increased capital reserves and greater flexibility to expand lending. Extending individual tax benefits offered under TCJA would lead to greater predictability in long-term tax planning for private wealth clients, which is likely to spur additional investment among higher-income individuals.

Proposed elimination of taxes on tips, overtime and Social Security

The administration has also proposed eliminating certain taxes on tips, Social Security benefits and overtime pay.

With increased disposable income, individuals may contribute more to savings and investment accounts, boosting financial firms’ assets under management — but with inflation running high, that additional income is more likely to go toward household goods. Past tax cuts have resulted in short-term boosts in consumer spending, with higher-income households more likely to save the extra income than spend it. In general, tax policies relating to tips, overtime and Social Security are more likely to impact working families and retirees, not high-net-worth individuals.

Carried interest loophole targeted for elimination

Private equity firms and registered investment advisors could face new tax obligations if the carried interest loophole is eliminated. Investment gains would be subject to ordinary income tax rates rather than lower capital gains rates, potentially reducing profitability in the private equity sector.

Many hedge funds and private equity firms rely on this tax treatment to maximize returns, and its removal could push firms to explore alternative investment strategies or shift operations offshore to more tax-favorable jurisdictions. If this happens, the out-migration of high-paying finance jobs could impact the U.S. job market in the financial sector, especially in financial hubs like New York and Connecticut. Private equity firms might prioritize short-term investments with quicker turnovers over long-term asset growth to mitigate tax impacts, which could reduce the availability of capital for U.S. startups and small businesses.

Potential long-term impacts of tax changes

If closing the carried interest loophole drives financial firms offshore, the anticipated $12-$13 billion revenue increase associated with this policy change may not fully materialize. That’s just one example of how tax rate reductions could impact the federal budget and deficit over the longer term, and how future tax increases or program cuts may be needed to offset revenue losses. This could erode investor confidence and impact financial markets.

Tariffs’ impact on international investment and insurance

Tariffs on Canada, Mexico and China

With new tariffs imposed on key trade partners, banks and investment firms with international exposure need to reassess their risk profiles and recalibrate their strategies to accommodate shifting supply chains and pricing structures. Increased costs for imported goods are likely to drive up inflation, which could impact interest rates, consumer borrowing patterns and the availability of capital for startups and small businesses.

Potential effects on insurance

Trade disputes and supply chain disruptions may also impact insurance markets. Increased costs in industries such as manufacturing and retail could lead to higher claims, particularly in commercial insurance lines.

Additionally, insurers with investments in heavily affected sectors may need to adjust their risk assessments. For example, commercial insurers are likely to increase premiums for logistics companies that rely on international suppliers. And if tariffs cause prolonged economic slowdowns, insurers could see higher loss ratios as businesses struggle to meet their financial obligations.

Will deregulation spur more investment?

The deregulatory agenda

The administration has signaled a broad deregulatory push, with the Treasury, the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC) expected to roll back certain compliance requirements.

This could ease administrative burdens for financial firms and improve lending activity, but it also necessitates careful compliance monitoring to help ensure firms remain within legal bounds. Institutions that take advantage of loosened regulations without due diligence could face the threat of lawsuits, reputational damage and increased scrutiny in the long term.

Scaling back Dodd-Frank and the CFPB

Efforts to scale back portions of the Dodd-Frank Act could reduce compliance requirements and costs for financial institutions, particularly those involved in lending and investment banking. Supporters believe a more relaxed regulatory environment, both through Dodd-Frank revisions and potential limitations on the Consumer Financial Protection Bureau (CFPB), will increase competition, spur innovation, provide new market opportunities and increase profitability. Others fear it could lead to a return to overleveraged lending practices and financial instability, which could increase market volatility.

Financial institutions can proactively implement or maintain consumer protection policies to avoid potential backlash from advocacy groups and establish a positive, pro-consumer reputation.

Health insurance deregulation

The administration’s stance on deregulating health insurance, which emphasizes expanded consumer choice and competition, could alter investment strategies for financial firms engaged in healthcare-related funds and insurance underwriting.

The administration’s expected plan to fund private Medicare Advantage plans, plus the anticipated expansion of alternative insurance options like association health plans, health savings accounts and short-term limited-duration insurance plans, could open new investment opportunities for financial firms. The deregulatory environment is likely to lower barriers to entry, reduce compliance costs and stimulate more M&A activity in healthcare.

Overall, these trends may make it easier for private equity firms to invest in healthcare companies. At the same time, the pharmaceutical sector is likely to enter a state of flux. Firms may want to reassess their pharma investments, given the rescission of certain drug pricing policies and ongoing Medicare drug price negotiations.

Pause on DOL appeal of Fiduciary Rule

The Trump administration has paused the Department of Labor’s court appeal regarding the Fiduciary Rule (aka the Retirement Security Rule). The original rule exempted financial advisors from issuing required fiduciary advice and documentation for one-time rollovers — such as from workplace retirement plans to IRAs — for simple changes in account types, and for sales of insurance and annuities by insurance company employees.

Under the prior administration, labor officials appealed that court ruling. Trump’s pause could signal a withdrawal from the case. The DOL’s legal team is required to provide updates in 60-day intervals, so more information should be available by mid-April, if not sooner. If the original deregulatory rule stands, financial advisors may face fewer compliance requirements. However, they must still navigate the same ethical and reputational considerations regarding fiduciary responsibilities.

SEC and FDIC focus on streamlining regulation

The SEC and FDIC are prioritizing innovation, technology adoption and process improvements within the financial services sector. Firms that proactively integrate digital solutions and automation, such as blockchain technology, into their operations may benefit from reduced regulatory burdens and improved efficiency, enhancing both compliance efficiency and market competitiveness.

Trump’s policies on credit unions

Several potential changes could threaten credit unions’ favorable regulatory and tax treatment, which have helped these smaller, community-oriented institutions compete with larger banks. Possible policy changes include: 

NCUA-FDIC merger

There is speculation that the administration may propose merging the National Credit Union Administration (NCUA) with the FDIC. Such a move could redefine regulatory oversight for credit unions, potentially increasing compliance requirements and restructuring deposit insurance models.

Tax exemption under scrutiny

A Republican policy proposal suggests eliminating credit unions’ tax-exempt status to offset the cost of extending the 2017 tax cuts. If implemented, this change could significantly impact credit unions’ profitability and their ability to offer competitive rates to members.

NCUA grant funding in question

Credit unions classified as Community Development Financial Institutions (CDFIs) are unsure how the administration’s executive order and January 27 memo freezing federal funds will affect ongoing grant programs. A follow-up memo from January 30 lifted the federal funding freeze, but uncertainties remain. Experts advise CDFI credit unions to continue preparing strong funding applications while monitoring policy updates, reviewing grant agreements and terms and preparing contingency plans for potential future funding disruptions.

How financial services firms can adapt

With these evolving policies shaping the industry landscape, financial services firms must remain agile and proactive. Right now, financial services firms can:

• Review tax strategies: Assess how potential tax changes impact investment planning and financial projections.
• Monitor regulatory developments: Stay informed on deregulatory actions to capitalize on potential advantages, while also ensuring compliance from both a “letter of the law” (regulatory) perspective and a “spirit of the law” (potential reputational impacts) perspective.
• Leverage technology: Invest in digital solutions to enhance operational efficiency and meet shifting regulatory expectations.
• Engage in advocacy: Participate in industry groups to influence policy discussions and stay ahead of emerging changes.

As the administration continues to refine its policy agenda, financial services firms must stay vigilant and adaptable. By proactively addressing these changes, firms can mitigate risks, capitalize on new opportunities and maintain a competitive edge in an evolving regulatory environment.

How Wipfli can help

Responding to these policy shifts requires informed decision-making. Wipfli provides tailored consulting services to help financial firms adapt, including tax advisory, regulatory compliance, technology solutions and strategic planning. For more information, visit our financial services industry page.