Our take: PwC's financial services update

Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

Current topics - December 1, 2017

CFPB: Two heads is better than…?

Two leaders showed up at the Consumer Financial Protection Bureau (CFPB) this week claiming to be the bureau’s Director: Administration appointee and Office of Management and Budget Director Mick Mulvaney and the CFPB’s appointee Deputy Director Leandra English. The dueling claims rest on conflicting statutes which the Department of Justice interpreted in favor of Mulvaney. English also lost a bid for an emergency temporary restraining order to stop Mulvaney’s appointment in a ruling by an Administration appointed DC Circuit Court Judge, which English has said she will appeal. English was appointed as Deputy Director of the CFPB by its former Director Richard Cordray on the date of his departure and her claim to the seat rests on an interpretation of Dodd-Frank that the Deputy Director will replace an absent or unavailable Director.

Upon arrival at the agency, Mulvaney placed a 30 day freeze on new hires and new regulations, a customary move by incoming leadership when an agency changes hands.

Our take

Don’t let this squall distract from the storm ahead: any CFPB will swing the agency’s mandate in a pro-business direction. Major regulatory initiatives in the pipeline, such as debt collection rules, will go dormant while some existing regulations such as payday lending could be on deck for rollback. But ultimately the CFPB isn’t going anywhere, although it will move forward at a slower pace. After all, it remains independently funded with authority over hot-button topics such as credit agency reporting and personal privacy. Plus, consumers are voters and failing to protect them from unfair financial practices would be politically unpopular.

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The 12 (working) days of Congress

Congress returned to work on Monday to tackle an ambitious agenda in the twelve legislative days currently scheduled before the end of the year.

Tax reform. On Tuesday, the Senate Budget Committee voted 12-11 along party lines to send the tax reform bill to the full Senate for a vote. Republicans can only afford to lose two votes prompting an hour-by-hour guessing game as a handful of Senators take turns at demanding must-have changes. As of publication, there are reportedly 50 votes committed which means the bill can pass with Vice President Mike Pence as the tiebreaker. Even then, tax reform is not yet law. The Senate bill has to be reconciled with the version that passed the House earlier this month. An appointed conference committee must negotiate the differences between the two bills and send that version back to each chamber for a vote before it goes to the President’s desk for signature.

Government funding. Legislators are still attempting to reach agreement to extend the existing stopgap continuing resolution to fund the government which expires on December 8, raising the spectre of a government shutdown if another resolution or full budget is not approved. Complicating matters is Democrats’ continued push for an immigration solution by year-end.

Financial regulatory reform. On December 5, the Senate Banking Committee will markup the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act. A key proposal under the bill would raise the threshold for a bank holding company to be considered a systemically important financial institution (SIFI) to $250 billion.

Our take

Tax and budget are not linked, this time. But a government shutdown looming could wreak havoc on all items on the legislative agenda, including tax. After failing to repeal the Affordable Care Act, Republicans set tax reform as a must-pass target ahead of the 2018 midterms and appear to have succeeded in the short-run. The next step of getting the Senate and House bills reconciled will be no easy task. Our Washington National Tax Services team is tracking every step that Congress takes on tax reform. To read the latest, click here.

Expect Congress to take a quick detour to funding and delay the deadline for a government shutdown with another stopgap spending bill that will push funding battles into the new year. As for Dodd-Frank reform in the Senate, the bipartisan bill appears to have the votes it needs for now, but lobbying and changes in markup that favor the big banks could lead crucial Democratic votes, and even some Republican votes, to waver.

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Filling the Fed, FSOC, and FDIC

On Tuesday, the Senate Banking Committee held a nomination hearing for Jerome Powell to replace Janet Yellen as Chair of the Federal Reserve System (Fed). In his testimony, Powell outlined a “stay the course” path for leading the Fed by maintaining current monetary policy. While he broadly defended many of the Fed’s post-crisis regulations, including capital and liquidity rules, resolution planning, and stress testing, he joined many of his colleagues by stating that he supports rewriting the Volcker rule and exempting smaller banks from stress tests. Powell also expressed his support for tailoring regulation and expressed that size should not be the only factor when assessing risk. Additionally, Powell noted that cyber threats may be the single most important risk that financial institutions, the economy, and the government face. The Senate Banking Committee will vote to advance Powell’s nomination to the full Senate on December 5.

Separately, the Administration nominated Marvin Goodfriend as a Fed governor on Wednesday. Goodfriend is a professor of economics at Carnegie Mellon University and previously served as the Director of Research at the Federal Reserve Bank of Richmond. As a professor, he has advocated for more transparency and Congressional oversight of the Fed’s monetary policy. If Goodfriend is confirmed, there will be three remaining Fed governor seats to fill.

The Administration also announced yesterday that it will nominate Jelena McWilliams a chair of the Federal Deposit Insurance Corporation (FDIC). McWilliams currently serves as Fifth Third Bank’s lead attorney, and will replace Obama appointee Martin Gruenberg at the FDIC. Finally, the Administration announced plans to nominate Thomas Workman to fill the insurance expert seat on the Financial Stability Oversight Council (FSOC). Workman was the president and CEO of the Life Insurance Council of New York until last year and, if confirmed, will replace S. Roy Woodall, Jr., who has been in this seat since 2011.

Our take

Two Trump appointees at the Fed and three to go. If the first two are any indication, the White House is not taking a disruptor’s axe to the nation’s central bank. We expect Powell to mostly continue on the path set out by the Yellen-led board of gradually raising short-term interest rates and winding down the Fed’s balance sheet as well as supporting relief for banks that are not Global Systemically Important Banks (G-SIBs). For the FDIC, replacing Martin Gruenberg ‒ a staunch defender of Dodd-Frank and opponent of deregulation ‒ should increase the chances of reforms to multi-agency regulations such as the Volcker Rule. Finally, keeping an industry insider in FSOC’s insurance seat comes as no surprise and will continue the momentum for                de-designation of the last remaining insurance SIFI.

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Fiduciary Rule documentation delays go final

The Department of Labor finalized the 18-month delay from January 2018 to July 2019 of the transition period for the Best Interest Contract (BIC) Exemption and the Principal Transactions Exemption, as well as the applicability date for amendments to Prohibited Transaction Exemption 84-24.

This delay means that investment advisors may continue to receive transaction-based compensation for advice to qualified funds until July 1, 2019 without their financial institutions having to send conflict of interest disclosures (e.g., regarding higher commissions for selling certain products), enter special contracts, or take other compliance steps required by the BIC Exemption. It does not impact the already effective Impartial Conduct Standards in the BIC exemption which currently require transaction-based advisors to comply with the fiduciary standards (i.e., best interest recommendations, reasonable compensation, no misleading statements).

Among the reasons cited for this extension, the DOL noted that it has not yet finished reexamining the fiduciary duty rule and prohibited transaction exemptions, as directed by a February 3 White House Memorandum. The DOL expects this review to help identify potential alternative exemptions or conditions that reduce costs and maintain choices for investors.

Our take

This delay is no surprise and no change to the fiduciary rule status quo. The hint of what’s to come in the text suggests that the DOL is not done with this topic, and while the SEC is purportedly working with the DOL on a best-interest standard, a joint solution is likely far off. However, as we’ve said, any delays or modifications to the fiduciary rule are not likely to divert the investment industry’s considerable efforts underway to meet the core and still-effective requirement of providing retirement advice that is in the client’s best interest.

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On our radar

These notable developments hit our radar this week:

  • LIBOR until 2021. On November 24 the UK Financial Conduct Authority (FCA), the regulator responsible for supervising the LIBOR submission process, published a statement confirming that all current panel banks ‒ the banks that submit their rates to determine the LIBOR rate ‒ have agreed to support the LIBOR benchmark until 2021. For more, see our Financial Market Insights article “Are these the last days of LIBOR?”
  • CFTC approves Bitcoin futures. The Commodity Futures Trading Commission (CFTC) approved this week the listing of Bitcoin futures products on the Chicago Mercantile Exchange and Chicago Board Options Exchange. Although it approved the listing of these products, CFTC Chairman Christopher Giancarlo warned potential investors about risks of investing in Bitcoin, including its high level of volatility and the unregulated nature of cryptocurrency markets.

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Julien Courbe
Financial Services Advisory Leader
Tel: +1 (646) 471 4771
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