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Our take: financial services regulatory update - January 8, 2021

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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 8, 2021

Democrats win Georgia runoffs

After two runoff Senate elections took place in Georgia on Tuesday, Democratic candidate Raphael Warnock is projected to have defeated incumbent Senator Kelly Loeffler (R-GA) and Democratic candidate Jon Ossoff is projected to have defeated former Senator David Perdue (R-GA). Democratic victories in the two Georgia races would result in a 50-50 Senate with the tie-breaking vote of Vice President Kamala Harris giving Democrats a de facto 51-50 majority.

With a Democratic Senate majority, President Biden would not have to win any Republican votes to have his nominees confirmed. However, he will still need at least 60 votes to overcome a potential filibuster for most legislation. Although some policies related to tax, spending, and debt limit legislation can be passed with a simple majority through the budget reconciliation process, moderate Democratic Senators like Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) will still have to be on board with any such votes. The entire Democratic caucus would also have to be in agreement if any major procedural changes, like removing the 60 vote filibuster for most legislation, are to take place.

Our take

Although it appeared likely that the Biden Administration would be checked by a Republican Senate, the dual victories in Georgia allow Democrats to expand the universe of what may be achievable. The razor thin Democratic majority in the Senate will certainly assuage concerns about President Biden’s ability to have his appointees confirmed, but we expect that he will continue to make mostly consensus picks that receive bipartisan and industry support, particularly for the financial services agencies. Still, a Democratic-controlled Senate may provide the Biden administration greater latitude to nominate regulators and agency officials who may take a more activist approach to regulations and administrative actions. One example could be his choice for CFPB Director, who will likely need to be a strong consumer advocate committed to aggressive enforcement to win the critical support of Senator Elizabeth Warren (D-MA). Senator Warren may also present a roadblock to potential appointees she considers to have too close of ties to the industry.

When it comes to financial services policy, it is still likely that the most change will come from the referees (i.e., regulators) rather than legislation due to the 60 vote filibuster and moderate Senators’ opposition to removing it. For example, Biden-appointed agency leaders will be able to enact rules around climate change risk but broad legislation in this area would likely have to meet the 60 vote threshold. Some climate-related tax measures changes could pass through the reconciliation process, which could also be the vehicle for urgent priorities such as the $2,000 relief payments that nearly upended the recently passed stimulus bill. Further down the road, reconciliation could be used to increase the US corporate tax rate and roll back some of the income and estate tax reductions in the Tax Cut and Jobs Act. The scope of any tax increases considered under the reconciliation process may be limited by the need to secure near-unanimous support from House Democrats and the support of all 50 Democratic Senators. For example, Senator Manchin has stated that he will not support increasing the corporate rate above 25%. While the industry may not look forward to tougher Congressional oversight, regulatory enforcement, and tax cut reversals, the economic buoy from additional stimulus may offer some consolation.

See our First take: Ten key points from the 2020 election for an updated look at what we expect from a Biden Presidency and the latest Tax Insights on the impact of the Georgia runoff results.

Post-Brexit update: UK and EU finalize trade agreement

On December 24, 2020, the UK and the EU finalized the negotiation of a new trade treaty known as the Trade and Cooperation Agreement (TCA). The TCA is a “narrow” trade agreement, focusing mainly on achieving tariff-free goods trade, with some additional provisions covering justice and domestic security, transportation and participation in some joint funding programs.

The TCA provides no implementation period nor any new arrangements for financial services. The UK-EU relationship on financial services will be addressed through unilateral regulatory equivalence determinations and decisions. Without centrally-taken EU decisions, financial services arrangements for UK-based firms have to be made on a country-by-country basis with EU Member States. In November 2020, the UK Treasury announced a range of equivalence determinations, a summary of which can be found here. But no new regulatory equivalence determinations have yet emerged from the European Commission since the TCA was announced, so as it stands the EC has only granted temporary equivalence for UK central clearinghouses and central securities depositories. Instead, the TCA includes only a shared commitment to agree a Memorandum of Understanding for establishing the “framework for cooperation,” by the end of March 2021. Any new equivalence decisions would then follow.

The TCA has been given provisional application by the EU until February 28, 2021, to provide time for the European Parliament to scrutinize and ratify it. It was ratified in the UK on December 30, 2020.

Our take

A deal is better than no deal. Without one, more political pressures would have been heaped on FS regulators and supervisors. But even so, it’s hard to be optimistic about the prospects for avoiding fragmentation and increased costs for global FS firms operating across the new EU-UK customs and regulatory border.

The EU has, so far, not provided any additional equivalence decisions to allow its EU-based firms to access London’s capital markets – just a weak commitment to agree a framework for making such decisions. Given that negotiators struggled for so long to agree “level playing field” provisions in the TCA, and that the deal sets up a centralized governance framework to manage disputes across sectors, it looks like trade arrangements for the FS sector could be a political football for some time. Until the dust settles on the implementation of TCA commitments in other sectors, the EU may be unwilling to make much progress for the FS sector. By the time the EU does eventually make some equivalence determinations, market participants may have already found new ways of doing business, mitigating the potential impacts of any decisions..

Firms operating in both the UK and EU now need to finish implementing plans for the “hard Brexit” which has resulted, including: customer migrations to new legal entities, changes to trade reporting, staff deployments for key risk and governance roles, and readiness of business travellers and workers for changed border frontier rules. Investment firms which had used London as a base but not yet set up EU legal entities will quickly need new country-by-country authorizations or other European distribution arrangements.

For more, see PwC’s Beyond Brexit podcast series

States file suit to block OCC true lender rule

On Tuesday, attorneys general from seven states (including New York and California) and Washington DC filed suit against the OCC seeking to set aside the agency’s true lender rule, claiming that it unconstitutionally facilitates violations of state usury laws. The OCC issued the final rule in October 2020, clarifying that the “true lender” for loans made by partnerships between fintechs and national banks, specifically providing that a bank is the true lender if, on the date of origination, it 1) is listed as the lender on the loan application or 2) provides the funding for the loan. In May, the agency finalized a rule codifying the “valid-when-made” principle, which allows nationally chartered banks to transfer loans to other banks and nonbanks such as fintechs even if state interest rate caps would prohibit the transferee from issuing the loan. However, that rule left open the question as to which organization is deemed the “lender” in bank partnerships, with some critics expressing concerns that nonbank lenders could simply use their bank partners as cover in order to avoid state requirements. 

Our take

Considering that 23 states and Washington DC released a statement after the OCC proposed the true lender rule condemning it as an “unconstitutional” proposal that “would enable predatory lenders to circumvent (state interest rate) caps through rent-a-bank schemes,” it was only a matter of time before the rule faced legal challenges. While it is difficult to speculate on the outcome of the suit, doing so may be unnecessary. President Biden will be able to appoint a new Comptroller upon taking office, Acting Comptroller Brian Brooks’ replacement could take a different approach to these rules if his or her views are in line with Congressional Democrats such as House Financial Services Committee Chair Maxine Waters (D-CA). As such, the rules may get reversed or scaled back before a court has the opportunity to decide on their constitutionality.

FinCEN and OCC move crypto closer to mainstream

Just before the holidays, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a proposal that would require banks and money service businesses to comply with customer identity verification, reporting and recordkeeping requirements for transactions involving certain digital assets. Under the proposal, individuals and exchanges would be required to provide FinCEN with detailed information when holdings of over $3,000 (for individuals) or $10,000 (for exchanges) are moved to private wallets or transacted. The proposal, which was subject to a truncated 14-day comment period rather than the usual 60 day period, received over 65,000 comments.  

In other news, on January 4th the OCC published an interpretive letter confirming the ability of federally chartered banks to use stablecoins (i.e., digital assets pegged to an external reference such as the US dollar or a commodity price) and participate in independent node verification networks to “conduct payment activities and other bank-permissible functions”. This means that the shroud of regulatory uncertainty has been lifted around a bank's ability to participate on a blockchain as a validator node enabling a bank to validate and store blockchain-based payments information.

Our take

There is no shortage of interest from both the general public and regulators in cryptocurrencies with market caps hitting highs of over one trillion dollars at the time of this publication. While the FinCEN and OCC developments evidence further maturation of regulators’ views of cryptocurrency, removing the uncertainty that has been a barrier to adoption, they have been received very differently. The FinCEN rule has resulted in a flood of comment letters expressing concerns around privacy issues as well as the last-minute rulemaking process as a new Administration is about to take over. In contrast, the OCC news was greeted much more favorably as it helps put to rest the enormous amounts of uncertainty that has prevented blockchain and stablecoins from improving the speed, cost and overall efficiency of payments facilitation. Recall, while the OCC’s interpretation impacts federally-chartered entities, state-chartered banks can invoke state parity laws to gain the same authorizations from their regulators.

On our radar

On our radar: These notable developments hit our radar over the past week:

  • Crisis update. Regulators have continued to take action in response to the crisis, including:
    • Yesterday, the Treasury Department (Treasury) and Small Business Association (SBA) released an interim final rule guidance on the Paycheck Protection Program (PPP) intended to consolidate existing rules and guidance.
    • Yesterday, Treasury announced the launch of a $25b emergency rental assistance program. States and local governments will be able to enroll in the program and grant assistance to households a) with income at or below 80% of the area median and b) that have experienced financial hardship or housing instability due to the crisis.
    • Yesterday, the SBA released an interim final rule on second draw PPP loans.
  • CFPB releases consumer financial protection report. On Tuesday, the CFPB released a report from its Taskforce on Federal Consumer Financial Law providing an overview of the current legal and regulatory environment and offering approximately 100 recommendations for improving it. These recommendations include authoring the CFPB to license non-depository institutions to provide lending, money transmission and payments services; expand access to the payment system for unbanked and underbanked consumers; and promote financial inclusion in rural communities.
  • SEC gets a new Acting Chair. On December 28, 2020, Elad Roisman was designated as Acting Chair of the SEC following the resignation of former Chair Jay Clayton.

Contact us

Julien Courbe

Financial Services Leader, PwC US

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