Financial Regulatory Reform Update

Welcome to PwC's Financial Regulatory Reform Update where we update you on the latest developments relating to financial services regulatory reform.

January 27, 2012

"A democratic government is the only one in which those who vote for a tax can escape the obligation to pay it." - Alexis de Tocqueville

"In West Virginia yesterday, a man was arrested for stealing several blow-up dolls. Reportedly, police didn't have any trouble catching the man because he was completely out of breath." - Conan O'Brien

Volcker Hearing: The Only Certainty Is Continued Uncertainty

At a Congressional oversight hearing on January 18, 2012, we heard directly from the leaders of the five Federal Regulatory Agencies charged with implementing the Volcker Rule. The regulatory officials generally confirmed what we had previously concluded about the Volcker Rule and validated our existing views on how firms should prepare.

Please click here to read the latest PwC FS Regulatory Brief for our perspective on the Volcker hearing, what firms should be doing now and our predictions on how firms should prepare.

FDIC Approves Final Rule Requiring Resolution Plans for Insured Depository Institutions with $50 Billion or More in Assets

On January 17, 2012, the FDIC approved a final rule requiring resolution plans for Insured Depository Institutions (IDIs) with $50 Billion or more in total assets -- so-called Covered Depository Institutions (CIDIs). The FDIC adopted this final rule on the basis of its legal authority under the FDI Act (and not under Dodd-Frank) The FDIC views this rule as a "complement" to the joint rule on resolution plans which the FDIC issued with the Federal Reserve under Section 165(d) of Dodd Frank for Systemically Important bank holding companies and designated nonbank financial companies. The FDIC stressed that it has concluded "that Resolution Plans for large and complex IDIs are essential for their orderly and least cost resolution and the development of such plans should begin promptly." With respect to this latter point, the initial filings for CIDIs will be staggered to correspond to the schedule of filings by parent SIFI companies under the SIFI Resolution Plan rule.

The FDIC indicated that currently 37 IDIs are covered by the rule. Effective April 1, 2012, the final rule will replace an interim final rule (IFR) adopted and published for comment by the FDIC last September and which became effective on January 1, 2012. While the final rule and IFR are largely similar, some changes were made in the final rule in response to public comments that were filed on the IFR. Following are highlights of these changes:

  • Recapitalization or Breakup as Strategic Options. The FDIC agreed with a suggestion by one commenter that a CIDI "may consider a post-appointment recapitalization in its Resolution Plan and a CIDI should address this option if it believes a recapitalization would be among the resolutions least costly to the deposit insurance fund." The FDIC also stated that a "breakup" is a legitimate resolution method and a CIDI may consider it as a resolution option.
  • Least Costly Requirement. The FDIC did not agree with a comment recommending that the rule not require the CIDI to demonstrate a strategy that is least costly ex ante to the FDIC's Deposit Insurance Fund. However, the FDIC stated that a CIDI can demonstrate a selected strategy is least costly by offering a range of transactions, while ensuring that the transactions are offered broadly to the market, competitive bids are taken and bids are evaluated carefully. It states that the preceding or other strategies can be developed for demonstrating that an option selected is ultimately least costly.
  • Corporate governance. One commenter had suggested that the final rule be modified to divide up responsibilities for developing a Resolution Plan among multiple senior management officials. In response, the FDIC had no objection to a CIDI dividing up responsibilities; however, it emphasized that the primary responsibility and accountability for the development, maintenance, implementation and filing of a Resolution Plan should be assigned to one senior management official.
  • Consultation with Primary Bank Regulator. In a change from the IFR, the FDIC may only determine under the Final Rule that a Resolution Plan is not credible after consulting with a CIDI's primary bank regulatory agency. Also, the FDIC in determining, within a reasonable period of time after filing a plan, a CIDI is able to demonstrate its capability to produce promptly accurate and verifiable data underlying the key aspects of its Plan, the FDIC will consult with the primary bank regulator for the CIDI before making any finding that the CIDI's ability to meet this requirement is unacceptable.
  • New CIDIs.With respect to an IDI that becomes a CIDI after the effective date of the rule, the rule was revised to coincide with the Section 165(d) Resolution Plan rule for SIFIs. Specifically, for an IDI that becomes a CIDI after the effective date, it must file a Resolution Plan no later than the next following July 1, provided such date occurs no earlier than 270 days after the date on which an IDI became a CIDI.
  • Potential Barriers or Obstacles to Orderly Resolution. The final rule adds a requirement that a resolution plan must identify "potential barriers or other material obstacles to an orderly resolution of the CIDI, inter-connections and inter-dependencies that hinder the timely and effective resolution of the CIDI, and includes the remediation steps of mitigating responses necessary to eliminate or minimize such barriers or obstacles." No examples of what such barriers or obstacles may be were provided.

The Consumer Financial Protection Board: An Appointed Director Ready and Able To Act

It seems the fate of the CFPB is to always be mired in controversy. First, there was the ideological political battle over Professor Elizabeth Warren as the putative Director, which was solved when she decided to run for the Senate seat in Massachusetts held by Scott Brown. Then came the strong preference among a number of legislators for a five-member board in lieu of a single Director, which derailed Mr. Cordray's confirmation in the last days of the Session. Finally came President Obama's recess appointment of Director Cordray which has raised the ire or approval of Constitutional scholars and politicians divided not surprisingly along conservative and liberal lines. It can be said that all of these controversies were not of the CFPB's making as it served as a pawn in larger political disagreements. However, now that the CFPB is armed with its full panoply of powers granted it by Dodd-Frank, it has the opportunity to create its own controversies.

If Director Cordray's recess appointment is upheld, his term would expire at the end of the "next Session." Because his appointment occurred in the present session of Congress which began on January 3, 2012, it appears that the Director's appointment would not expire until the end of the First Session of the 113th Congress in 2013. That gives Director Cordray almost two years to shape the Agency. Judging by the issuances that have come out of the CFPB in the past several weeks, the Director is off to a fast start.

Following are highlights of CFPB initiatives since the Director was appointed.

  • Launch of Nonbank Supervision Program. On January 5, 2012, the CFPB launched the first federal nonbank supervision program, one of the central new responsibilities the agency acquired with a director. This will be an extension of the CFPB’s bank supervision program that began last July and will ensure that banks and nonbanks follow federal consumer financial laws.
    • A “nonbank” – or non-depository business – is defined as a company that offers or provides consumer financial products or services but does not have a bank, thrift, or credit union charter. Nonbanks include companies such as mortgage lenders, mortgage servicers, payday lenders, consumer reporting agencies, debt collectors, and money services companies.
    • Under the law, the CFPB now has the authority to oversee nonbanks, regardless of size, in certain specific markets: mortgage companies (originators, brokers, and servicers including loan modification or foreclosure relief services); payday lenders; and private education lenders.
    • For other markets, the CFPB can also supervise the larger players, or “larger participants.” Last summer, the CFPB sought public comment to develop an initial rule, identifying six possible markets for consideration—debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit and related activities, and money transmitting, check cashing and related activities.
    • Like the bank supervision program, the CFPB’s nonbank supervision program is designed to ensure that nonbanks comply with federal consumer financial laws and it is designed to assess risk to consumers arising from these businesses. The program will include conducting individual examinations and may also include requiring reports to determine which businesses need greater focus. How often and to what degree the examinations are performed will depend on CFPB’s analysis of risks posed to consumers based on factors such as the nonbank’s volume of business, types of products or services, and the extent of state oversight.
    • The CFPB’s approach to nonbank examination will be the same as its approach to bank examination. The CFPB Examination Manual, released in October, is the field guide that examiners will use for both. It is available on the CFPB website at: http://www.consumerfinance.gov/guidance/supervision/manual/
  • Publication of Mortgage Origination Examination Procedures. On January 11, 2012, the CFPB published its Mortgage Origination Examination Procedures. These procedures are a field guide for CFPB examiners looking at mortgage originators in both the bank and nonbank sectors of the industry. In October, the CFPB published its Mortgage Servicing Examination Procedures, and the CFPB’s examiners will use these procedures to examine both nonbank and bank servicers.
    • The CFPB notes that until now, a significant part of the mortgage market — which includes independent lenders, brokers, servicers, and others unaffiliated with banks and depository institutions — has not been subject to federal supervision
    • These product-specific procedures are an extension of the CFPB’s general Supervisory and Examination Manual. The Mortgage Origination Examination Procedures outline the CFPB’s supervisory approach to ensure mortgage originators — lenders and brokers — comply with federal consumer financial laws. In particular, the Procedures describe the types of information that the agency’s examiners will gather to evaluate mortgage originators’ policies and procedures, assess whether originators are in compliance with applicable laws, and identify risks to consumers throughout the mortgage origination process.
    • The CFPB will be implementing its nonbank mortgage supervision program based on its assessment of risk to consumers, including consideration of factors such as the volume of business, types of products or services, and the extent of state oversight. The CFPB will also be coordinating with federal and state regulators in order to maximize overall supervisory capability and minimize regulatory burden.
  • Publication of Payday Lender Examination Procedures.On January 19, 2011, the CFPB convened the agency’s first-ever field hearing in Birmingham, Alabama to gather information and input on the payday lending market. The hearing coincided with the publication of the CFPB’s Short-Term, Small-Dollar Lending Procedures – a field guide that CFPB examiners will use to make sure payday lenders – banks and nonbanks – are following federal consumer financial laws.
    • The CFPB noted that payday loans are typically marketed to bridge a cash flow shortage between pay or benefits checks. They generally have three features: the loans are small dollar amounts; borrowers must repay the loan quickly; and they require that a borrower give lenders access to repayment through a claim on the borrower’s deposit account. Payday lenders have sprung up across the country over the past 20 years, beginning in storefront locations. With the advent of new media, payday loans now are offered through the Internet. Most recently, some banks began offering similar loan products.
    • The Short-Term, Small Dollar Lending Procedures describe the types of information that the agency’s examiners will gather to evaluate payday lenders’ policies and procedures, assess whether lenders are in compliance with federal consumer financial laws, and identify risks to consumers throughout the lending process. The procedures track key payday lending activities, from initial advertisements and marketing to collection practices.
    • The CFPB will be implementing its payday lending supervision program based on its assessment of risks to consumers, including consideration of factors such as the volume of business and the extent of state oversight. The CFPB also will be coordinating with federal and state partners to maximize supervisory capability and minimize regulatory burden. If a violation of a federal consumer financial law has occurred, the CFPB will determine whether supervisory or enforcement actions are appropriate.
  • CFPB Adopts Remittance Transfer Rule to Protect Consumers Sending Money Internationally.On January 20, 2012, the CFPB adopted a rule that will increase protections for consumers who transfer money internationally. Under the new rule, remittance transfer providers will generally be required to disclose the exchange rate and all fees associated with a transfer so that consumers know exactly how much money will be received on the other end. The rule also requires remittance transfer providers to investigate disputes and remedy errors. Prior to the passage of the Dodd-Frank Act, international money transfers were generally excluded from existing federal consumer protection regulations. To remedy this, the Act expanded the scope of the Electronic Fund Transfer Act to provide protections for senders of remittance transfers, and mandated that rules implementing certain provisions of the new protections be issued by January 21, 2012.
    • Under the CFPB’s rule, remittance transfer providers must disclose the fees, the exchange rate, and amount to be received by the recipient. Disclosures must generally be provided when the consumer first requests a transfer and again when payment is made. Consumers will generally have 30 minutes after payment is made to cancel a transaction.
    • Dodd-Frank transferred authority to implement the new requirements from the Federal Reserve Board to the CFPB in July 2011. The Federal Reserve Board had issued a proposed rule in May 2011. The final rule provides for a one-year implementation period. In issuing the final rule, the CFPB considered the Federal Reserve Board’s proposed rule and comments that were received.
    • The CFPB will publish a Notice of Proposed Rulemaking along with the final rule. The Notice seeks comment on whether to make a few additional adjustments to the final rule, including setting a threshold that would minimize the impact of the rule on community banks, credit unions, and other companies that do not normally process these transactions. The CFPB will act on an expedited basis to make any further changes prior to the effective date of the final rule.

The U.S. Treasury Department Office of Financial Research: Funding with Fees from SIFIs

Funding the OFR

In contrast to the CFPB, the Office of Financial Research (OFR) established by Dodd-Frank within the U.S. Treasury Department has largely been flying below the radar -- until now. On January 3, 2012, the Treasury Department published a proposed rule explaining how it would assess Systemically Important Financial Institutions to fund the operations of the OFR, which include the expenses of the Financial Stability Oversight Council (Council) and FDIC expenses associated with the implementation of the Orderly Liquidation Authority. All of these expenses are paid out of the Financial Research Fund (FRF), a fund managed by the Department of the Treasury. Covered SIFIs would be bank holding companies with $50 billion or more in assets, foreign banking organizations with US banking operations with $50 Billion or more of global assets and designated nonbank financial companies.

Under the proposed rule, Treasury has developed procedures to estimate, bill and collect, on an ongoing basis -- beginning on July 20, 2012 -- the total budgeted expenses of the OFR, including those estimated separately by the Council and expenses submitted by the FDIC. The aggregate of these estimated expenses would provide the basis for an assessment that the Treasury would allocate to individual companies by means of a semiannual assessment fee calculated from a schedule based on each company’s total consolidated assets. For a foreign company, the assessment fee would be based on the total consolidated assets of the foreign company’s combined U.S. operations.

The proposed rule outlines how the Treasury’s assessment fee program would be administered, including (a) how the Treasury would determine which companies will be subject to an assessment fee, (b) how the Treasury would estimate the total expenses that are necessary to carry out the activities to be covered by the assessment, (c) how the Treasury would determine the assessment fee for each of these companies, and (d) how the Treasury would bill and collect the assessment fee from these companies. Treasury is seeking comments on all aspects of this proposed rulemaking.

Allocation of Assessments & Fees

The Treasury determined that it would be reasonable to allocate the assessment base among assessed companies by means of an assessment fee that is based on the asset size of each assessed company. Under the proposed rule, the Treasury would allocate the assessment basis to each assessed company in the following manner:

  • An assessment fee rate would determine the semiannual assessment fee collected from each assessed company, based on the company’s total assessable assets.
  • Total assessable assets of each assessed company would be determined by the Treasury on a prescribed determination date.

For bank holding companies and foreign banks, the proposal would generally use asset figures as reported in their most recent regulatory reports to the Federal Reserve. For nonbank financial companies, financial statements would generally be used to calculate assessable assets. Foreign banks with less than $50 billion in combined US assets would not be assessed.

Based on data on assessable assets as of June 30, 2011, it was estimated by Treasury that for every $100 million collected the range of assessments would be $280,000 for the smallest assessed company (with just over $50 billion in assets) to $12.5 million for the largest assessed company (with approximately $2.3 trillion in assets).The ten largest assessed companies would provide roughly two-thirds of the total assessed amount.

Public comments must be provided by March 5, 2012.

The CFTC Approves and Publishes Two Key Final Rules and a Preliminarily List of Final Rules and Interpretive Orders the CFTC may consider in 2012

Swap Dealer Registration

On January 11, 2012, the Commodity Futures Trading Commission (CFTC) approved a framework for registering swap dealers and major swap participants under Dodd-Frank and outlined their duties to swap counterparties. Because many rules applicable to swap dealer business conduct and compliance have not yet been finalized, the CFTC created a registration process that permits—and soon will require—provisional registration with rolling compliance obligations that lead to full registration. Voluntary registration could begin as early as three months from now, with mandatory registration possible a few months later. This contrasts with the SEC which has not finalized how or when it plans to require registration of security-based swap dealers and major security-based swap participants.

Swap Dealer Business Conduct Rules

The CFTC also finalized swap dealer external business conduct standards on January 11, 2012. This is one of several key regulations that will change the way swap dealers operate in Dodd-Frank regulated derivatives markets. The standards focus on counterparty protection and will require swap dealers and major swap participants (MSPs) to conduct counterparty due diligence, check for institutional suitability and provide certain disclosures and valuation information. If a swap dealer or MSP is trading with a “special entity,” which includes municipalities, government agencies and pension plans, it must meet extra business conduct standards designed to protect these entities from inappropriate swap investments.

Each of these final rules is reviewed in more detail in a PwC FS Regulatory Brief -- click here.

CFTC List of Rules and Orders That May be Finalized in 2012

At the same meeting on January 11, 2012, the CFTC released a Preliminary List of Final Rules and Interpretive Orders that it may consider in 2012 under Dodd-Frank.

January to March 2012

  • Commodity Options
  • DCMs
  • End-User Exception
  • Entity Definitions
  • External Business Conduct
  • Internal Business Conduct (Duties, Recordkeeping, CCOs)
  • Product Definitions
  • Registration of SDs and MSPs
  • Reporting of Historical Swaps
  • Segregation for Cleared Swaps
  • Client Clearing Documentation, Clearing Member Risk Management, Straight Through Processing

April 2012 and after

  • Block Rule
  • Capital and Margin
  • Conforming Rules
  • Disruptive Trade Practices
  • Extraterritoriality
  • Governance and Conflict of Interest
  • Implementation (clearing and trade execution)
  • Internal Business Conduct (Documentation)
  • Process for Making a Swap Available to Trade (SEFs and DCMs)
  • SEFs
  • Segregation for Uncleared