Our take: The changing regulatory landscape

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

Current topics – January 22, 2021

Biden Begins: First steps in financial services

On Wednesday, Joe Biden was formally sworn in as the President of the United States and Kamala Harris was sworn in as Vice President. In addition to issuing a series of Executive Orders largely focused on non-financial services priorities such as immigration and climate, the new Administration moved forward with financial services nominations and confirmations. Specifically, it nominated Gary Gensler to be the head of the SEC and Rohit Chopra to lead the CFPB. Gensler previously served as CFTC Chair in the Obama Administration and is currently a professor at the MIT Sloan School of Management where he focuses on blockchain technology, digital currencies and fintech. Chopra previously served as the CFPB’s assistant director and student loan ombudsman and currently serves as an FTC Commissioner.

Meanwhile, the Senate on Tuesday held a confirmation hearing for Treasury Secretary nominee Janet Yellen. In her opening remarks, Yellen indicated that, if confirmed, she would immediately focus on measures to advance the economic recovery while addressing inequality would be a longer-term priority. In response to questions, she confirmed that the Administration will recommend that Congress repeal parts of the Tax Cuts and Jobs Act of 2017 that benefit “the highest-income Americans and large companies,” but it will not support a total reversal of the law. She also revealed that she intends to appoint someone “at a very senior level” to focus on climate risk. In response to written questions submitted after the hearing, she reiterated that regulators should take action to address financial risks related to climate change and explained that she believes they must develop a framework for digital currencies to encourage their positive aspects while curbing money-laundering and other malign activities. Regarding the Financial Stability Oversight Council (FSOC) - which is led by the Treasury Secretary - she expressed that it should address any risk that threatens the stability of the financial system including “looking into the Treasury market disruption and any potential interplay with non-bank financial risks.”

The new Administration also released an Executive Order (EO) and memoranda regarding its approach to regulation. Specifically, it called for all regulations that have not yet been published in the Federal Register to be frozen pending review from the agencies and for all rules that have been published but have not yet taken effect to be postponed by 60 days. It also released an EO rescinding various Trump Administration policies on regulation, including an EOs instructing agencies to not treat guidance as though it has the force of law, calling for agency-private sector cooperation in enforcement, establishing a task force to recommend reversals of “unnecessarily burdensome” regulation, and requiring that for every new regulation issued, at least two prior regulations be identified for elimination. Going forward, it instructed the Office of Information and Regulatory Affairs (OIRA) to provide recommendations for improving and modernizing regulatory review. On Tuesday, it released a list of agency actions with a harmful environmental impact that it would review, which included a recent DOL rule restricting retirement account managers from investing based on environmental, social and governance (ESG) factors.

Our take

With the nominations of Gensler and Chopra - described by Senator Elizabeth Warren (D-MA) as a “tenacious regulator” and a “fearless champion for consumers,” respectively - the Biden Administration has made clear that it is assembling a team of experienced regulators with strong consumer protection and enforcement credentials. In addition to pursuing an aggressive enforcement agenda against bad actors, we expect Gensler to increase the agency’s focus on ESG disclosures, particularly those related to climate change and diversity. Considering his recent academic focus on fintech and digital currencies, he could also focus on developing frameworks to balance encouraging innovation while protecting investors. As Chopra was involved in launching the CFPB, he may be eager to return the agency to operating according to its original intent and to reverse some of the actions taken under former Acting Director Mick Mulvaney and Director Kathleen Kraninger. Under his direction, CFPB priorities will likely include strengthening rules around payday lending, student loans, arbitration agreements, algorithmic bias and data collection. The agency could also be expected to return to a stronger enforcement posture and collect higher penalties for consumer harm.

Meanwhile, Yellen’s confirmation hearing provided further evidence for our earlier prediction that financial regulation will not be a high priority for the early part of President Biden’s term, with discussions on regulatory reform taking a back seat to other priorities such as addressing the current crisis. While she held back from going into specifics on regulatory policies, her recognition that financial institutions have adequate capital and liquidity to withstand the current crisis we see an acknowledgment that she will not seek to turn back the majority of the Dodd-Frank reforms taken by the Trump Administration. Beyond addressing existing (or past) regulations, it is clear that the tone from the top for the Biden Administration’s economic and regulatory policy will include climate change risk as a key forward-looking consideration.

While the EO and memos on regulation were buried under the many other headlines this week, they should not be overlooked. The freeze on recently-published rules means that the recent OCC fair access rule restricting banks from making lending decisions based on ESG factors will likely not make its way to the Federal Register. The EO rescinding various Trump Administration policies that created roadblocks to new regulation combined with the memo instructing OIRA to modernize its review process shows that the new Administration is clearing the road for agencies to advance its agenda. Its interim OIRA regulatory review leader, Sharon Block, has been an outspoken advocate for modernizing OIRA’s review process so that agencies can address urgent issues such as the pandemic response and crisis without the office serving as a bottleneck. Regarding the rescinding of the previous Administration’s EO that regulatory guidance should not have the force of law, we anticipate that the Biden Administration may use guidance to provide more detailed examples - potentially including through numerical thresholds - of the application of its rules, but we do not expect it to return to the era of rulemaking through guidance. In the case it were to do so, it would likely have to defend the constitutionality of its actions in court.

On our radar

These notable developments hit our radar over the past week:

  • LIBOR transition: We are monitoring progress on a potential legislative solution for legacy LIBOR-based contracts and the launch of a credit sensitive alternative index:
    • As part of New York State’s Executive Budget submitted on Tuesday, Governor Andrew Cuomo included a legislative proposal to facilitate the statutory replacement of LIBOR in contracts that contain no or inadequate provisions to address a permanent cessation of the benchmark. The legislation, based on a proposal from the Alternative Reference Rates Committee (ARRC), an industry group charged with facilitating the transition away from USD LIBOR, would primarily serve as a safety net for legacy LIBOR-based contracts that cannot reasonably be amended prior to LIBOR’s cessation.
    • On Wednesday, Bloomberg announced that it had begun publication of the Bloomberg Short Term Bank Yield Index (BSBY), a credit sensitive benchmark based on commercial paper, certificates of deposits, USD bank deposits and bank bond trades. Bloomberg, which made it clear that they continued to support the adoption of SOFR as the recommended alternative to USD LIBOR, are positioning the BSBY as an alternative for banks who had questioned the suitability of a risk-free rate, such as SOFR, as a lending rate.
  • Fed finalizes capital planning and stress testing rule. On Tuesday, the Fed approved a final rule that made adjustments conforming its stress testing and capital planning rules with its tailoring rule. Among other changes, it clarifies that “Category II” banks (i.e., those with $700b or more in total assets or $75b or more in cross-jurisdictional activity) and “Category III” banks (i.e., those with $250b or more in total assets or $75b or more in nonbank assets) can apply the less less-stringent capital planning requirements from SR 15-19. It also removes the requirement for “Category IV” banks (i.e., those with $100 billion to $250 billion in total assets) to conduct company-run stress tests and allows them to opt-in to stress testing in off years in order to receive an updated stress capital buffer requirement. Another notable provision applies capital planning and stress capital buffer requirements to savings and loan holding companies in the same manner as they apply to bank holding companies.
  • CFTC Chair steps down. Yesterday, former Heath Tarbert stepped down from his position as CFTC Chair. He will temporarily remain a CFTC Commissioner. On the same day, Rostin Benham was appointed as Acting Chair.
  • Allison Herren Lee named SEC Acting Chair. Yesterday, the White House appointed Allison Herren Lee as Acting Chair of the SEC. She will serve in this position until a permanent Chair is confirmed. As described above, the Administration on Wednesday nominated Gary Gensler to fill this position.

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Julien Courbe

Financial Services Leader, PwC US

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