Our take: The changing regulatory landscape

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Current topics - January 17, 2020

Visa moves beyond the card

On Monday, Visa announced that it will acquire open banking network Plaid for $5.3b. Plaid allows users to connect their bank accounts to third party applications through technology called open application program interfaces (APIs) as well as traditional “screen scraping.1” In contrast to traditional “screen scraping,” which requires that customers provide third parties with their login credentials for their bank account and scans for relevant data, APIs provide an encrypted protocol for communication between bank accounts and third parties. Visa explained in its investors’ call that one in four US bank account holders have used Plaid’s services through third party payments and investment applications, and that its acquisition will help the company expand its fintech partnerships and broaden its global reach. The companies expect to close the deal in three to six months, pending regulatory approval.

Our take

By acquiring one of the biggest players in open banking facilitation, Visa is making it clear that it is evolving with the market as payments move beyond cards both in the US and abroad in regions where cash economies are rapidly going digital. It also provides Visa with a new capability to showcase and enhance its value proposition to its bank partners and stakeholders. The acquisition comes at a time when large established financial firms are acquiring fintechs not only to enter into new technologies such as open banking but also to attract more digitally-savvy customers. Watch this type of movement increase as more major players take steps to maintain their relevance as technology and consumer payment preferences continue to evolve.


1. In contrast to screen scraping, which requires that customers provide third parties with their login credentials for their bank account and scans for relevant data, APIs provide an encrypted protocol for communication between bank accounts and third parties.

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Sustainable finance: Industry takes the lead in the US

On Tuesday, BlackRock released a letter to investors explaining that it will begin a series of initiatives to promote sustainability in its investments. The firm plans to offer versions of its model portfolios that emphasize environmental, social and governance (ESG) factors, expecting that over time these portfolios will become its flagship products. It will also exit active fund investments in certain high-risk sectors such as thermal coal. Other initiatives include developing programs to assess climate risk, performing climate stress tests, providing transparency into funds’ carbon footprints and expanding ESG ETF offerings.

The letter comes as sustainability has drawn more focus by both the industry and regulators around the globe. Last month, the European Banking Authority (EBA) released its action plan for sustainable finance. The first phase of the plan, to be completed in 2021, will include the development of technical standards around disclosure, reporting and communication for sustainable finance activities. The second phase will involve developing climate stress tests and the third phase calls for the EBA to assess whether to afford favorable capital treatment for exposures associated with environmental objectives.

While US regulators have been slower to act on the issue, the SEC recently sent examination letters to funds that advertise that they follow ESG criteria to determine whether they truly adhere to such principles. However, in contrast with Europe, US regulators have made it clear that they do not intend to conduct climate stress tests in the near future - for example, the Fed has indicated that it currently views climate change risk as a part of current disaster recovery and severe weather programs. The House recently saw ten Democratic Representatives introduce a bill that would require the Fed to conduct climate change stress tests but it has not been taken up for a vote.

Our take

With near-term regulatory requirements seeming unlikely in the US and the chances of the climate change bill passing a divided Congress slim-to-none, we are seeing the industry take the lead as it recognizes the reputational damage from high climate risk investments as well as climate change’s potential impacts to the overall economy. However, considering the interconnected nature of the financial services industry, the EU rules could eventually create a domino effect of other regulators implementing similar requirements as they become the industry standard for firms that operate on a global scale. As a result, taking steps such as those outlined in BlackRock’s letter will leave firms well-positioned to comply and compete. With regard to the EU’s action plan itself, we expect that many of its goals will become a reality, but regulators will likely be reluctant to give firms a break on their capital requirements solely because of their green investments.

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LIBOR transition: You’ve got (more) mail

Yesterday, the UK Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) sent a letter to UK banks and insurers outlining their expectations for LIBOR transition progress during the coming year. The letter stresses the regulators’ support of the Working Group on Sterling Risk Free Rates’ (RFRWG) targets for 2020, which were published on the same day. These targets include 1) switching the convention from LIBOR to SONIA, the RFRWG’s recommended GBP LIBOR alternative,  for sterling interest rate swaps on March 2, 2020; 2) ceasing the issuance of cash products linked to GBP LIBOR by the end of the third quarter; and 3) significantly reducing the stock of contracts referencing LIBOR by the end of the year.[1]

To further support the transition from LIBOR, the RFRWG published a number of additional documents, including working papers on the use of SONIA in cash markets, lessons learned from recent conversions of legacy bonds by means of consent solicitation, and a factsheet summarizing the case for taking action now. In support of the third stated target for 2020, the PRA and FCA themselves issued a statement encouraging market makers to change the market convention for GBP interest rate swaps from LIBOR to SONIA beginning on March 3, 2020.

[1] For additional detail on the letter, please read PwC’s At a Glance: Regulators crack whip on LIBOR transition

Our take

firms will need to be prepared to fight the fire on two different fronts. The transition of existing contracts is likely to command significant resources, especially in the case of complex bilateral agreements. At the same time, firms will have to contend with the UK regulators’ ambitious target of ending the use of LIBOR in new cash products altogether by the end of the third quarter. Meeting this target will be very challenging given the industry’s preference for term reference rates (which are not yet available for SONIA) and necessary system updates (which require time to complete). And while the transition from LIBOR has long been characterized as a voluntary, market-driven event, the PRA and FCA have made it clear that they are prepared to compel this transition. Although such a line in the sand has not yet been drawn in the US, firms should expect to hear a similar message when it comes to accelerating the use of SOFR, the ARRC's recommended alternative for USD LIBOR, in new cash products.

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On our radar

These notable developments hit our radar this week:  

  1. Quarles in charge. Today, Fed Vice Chair for Supervision Randal Quarles gave a speech in which he outlined a number of upcoming actions and priorities for Fed supervision. Specifically, he discussed large bank supervision categories, stress testing, transparency, supervisory findings, and the Fed’s position on guidance. Stay tuned for our First take next week.
  2. Administration looks to fill the Fed. Yesterday, the Administration announced that it would formally nominate Christopher Waller and Judy Shelton to the Fed. Waller is the current research director at the St. Louis Fed and has advocated for Fed independence, a default insurance system, and greater flexibility with inflation targets. Shelton, the former US executive director at the European Bank for Reconstruction and Development, holds more controversial views including calling for a return to the gold standard.
  3. FDIC on cybersecurity. Citing a “heightened cybersecurity risk” facing the financial sector, the FDIC yesterday released a document reminding financial institutions of cyber risk management principles from existing guidance. Such principles include using multifactor authentication, encrypting sensitive data, limiting access to those who need it and conducting regular backups.

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Julien Courbe

Financial Services Advisory Leader, PwC US

Tel: +1 (646) 471 4771

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