Our Take: financial services regulatory update – November 22, 2024

• What happened? On November 21st, the CFPB finalized a rule that would provide the agency with supervisory authority, including the ability to conduct examinations, over large nonbank participants in the digital payments market.
• What are the key elements and what changed from the proposal?
  • Applicability determination with higher volume threshold. The final rule defines a “larger participant of a market for general-use digital consumer payment applications” as a nonbank (together with its affiliated companies) with an annual volume of at least 50 million payment transactions in a year (up from five million in the proposal) that is not “small business” as defined by the Small Business Administration. The final rule also clarifies that “general use” is based on whether a consumer can use the payment application to pay more than one unaffiliated person.
  • Crypto and other digital assets excluded. Whereas the proposal’s definition of “funds” specifically included digital assets, the final rule’s scope only includes transactions conducted in U.S. dollars.
  • Examination authority. The rest of the rule was finalized largely as proposed, specifying that the CFPB would examine applicable larger participants for compliance with prohibitions against unfair, deceptive, and abusive acts and practices; the privacy provisions of the Gramm-Leach-Bliley Act (GLBA) and its implementing Regulation P; and the Electronic Fund Transfer Act (EFTA) and its implementing Regulation E.
• What’s next? The rule is effective 30 days after publication in the Federal Register.

Our Take

A bold move with an uncertain future. Coming the day after the banking regulators pledged to hold off on major rulemaking until the new administration takes over, this final rule shows that CFPB Director Rohit Chopra is taking a different approach of making a mark on the agency while he still can. While the rule falls well within the window of potential overturning via the Congressional Review Act, increasing oversight of big tech companies has attracted bipartisan support and rare support for CFPB rulemaking from banks, as the rule is consistent with their long-held view that there is an uneven regulatory landscape for financial services activities conducted outside the banking system. However, Republicans have historically been opposed to expansion of the CFPB’s authority and several members of the HFSC criticized the proposal as lacking adequate justification and introducing regulatory uncertainty. Even if the rule survives, any examinations of nonbank digital payment providers would occur under the direction of new CFPB leadership which is unlikely to share Chopra’s vision or approach.

The affected nonbank tech companies will undoubtedly push for the rule to be overturned, or challenge it in court, as direct supervision would open them to scrutiny that would disrupt - and potentially derail - their business and operating models. If they become exposed to bank-like examinations, they would need to develop the necessary technology, controls and skillsets, including maintaining a complete inventory of relevant regulations, understanding how those regulations apply and ensuring that there are sufficient controls and other risk management practices (e.g., risk assessments, testing and monitoring programs, training) in place. Although they may avoid this kind of scrutiny for now if challenges to the rule are successful, the tech companies would have a hard time avoiding it in the future if they fail to protect against fraud, data breaches and other consumer harms.

• What happened? On November 14th, the Executive Committee of the International Association of Insurance Supervisors (IAIS), which represents insurance regulators from over 200 jurisdictions, approved the final version of the Insurance Capital Standard (ICS). In 2013, the Financial Stability Board charged the IAIS with developing a comprehensive supervisory and regulatory framework (ComFrame) for internationally active insurance groups (IAIGs), including a quantitative capital standard.
• What was determined with respect to U.S. standards? The IAIS concluded that the Aggregation Method (AM) developed by the U.S would produce comparable outcomes to the ICS, noting areas of convergence like the treatment of interest rate risk and appropriate timing of supervisory intervention. On November 13th, the Fed published a report on the impact of adoption of the ICS on U.S. consumers and markets. The report concluded that the ability to comply with the AM, which would be facilitated via the Group Capital Calculation already adopted by the state insurance regulators, would result in “little incremental cost or burden for U.S. IAIGs or impacts on U.S. markets and consumers.”
• What’s next? The ICS is scheduled to be adopted at the IAIS Annual General Meeting on December 5th. It is expected that the ICS and AM will be subject to the same implementation schedule with self assessment in 2026 and targeted jurisdictional assessment in 2027.

Our Take

A victory for U.S. insurers. The outcome of the comparability assessment is a relief to U.S. insurers who will likely not need to make large scale investment return and capital calculation adjustments to comply with the ICS. U.S. insurers will still need to update their compliance and risk processes to align with state capital requirements and, for those impacted, the AM. In contrast, overseas insurers doing business in the U.S. will need to comply with their own country’s adoption of the ICS which may be more punitive than the AM with respect to investment return assumptions. However, the full impact of the divergent approaches on both the domestic and cross-border competitive landscape will only become clear once they have been fully implemented in the coming years.

These notable developments hit our radar recently:

• Gensler announces departure. On November 21st, the SEC announced that Chair Gary Gensler would be stepping down from the Commission effective at noon on January 20th, 2025.
• Federal court strikes down SEC dealer rule. On November 21st, a Texas federal district court judge ruled that the SEC had “exceeded its statutory authority” with its rule to expand the definition of the term “dealer” under the Exchange Act. The rule was adopted in February 2024 and would require some previously exempt firms, including proprietary trading firms and hedge funds, to register with the SEC as dealers, become members of a self-regulatory organization, and comply with applicable federal securities laws. The Court stated that the SEC’s new definition is “not consistent with the provisions and purposes of the Exchange Act.” The SEC can still appeal the decision to the Fifth Circuit but it is unlikely that Gensler’s successor will do so.
• Treasury imposes additional sanctions on Russian financial institutions. On November 21st, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced it would impose additional sanctions on Russian financial institutions including the country’s third-largest bank, more than 50 internationally connected banks, over 40 securities registrars and 15 finance officials. Additionally, OFAC issued an alert describing the sanctions risks related to Russia’s System for Transfer of Financial Messages (SPFS), which it alleges is used to evade sanctions.
• CFTC Advances Recommendation on tokenized non-cash collateral. On November 21st, the CFTC’s Global Markets Advisory Committee (GMAC), advanced a recommendation to expand the use of non-cash collateral through the use of distributed ledger technology. This recommendation provides a legal and regulatory framework for how market participants can apply their existing policies, procedures, practices, and processes to support use of distributed ledger technology for non-cash collateral in a manner consistent with margin requirements.
• Fed announces details and focus of upcoming policy framework review. On November 22nd, the Fed announced more details about its upcoming review of the framework it uses to pursue its Congressionally-assigned goals of maximum employment and price stability. The review will focus on two specific areas, the Federal Open Market Committee's statement on longer-run goals and monetary policy strategy, and the Committee's policy communications tools.