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Our Take: financial services regulatory update - April 23, 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 - April 23, 2021

Earth Day marks numerous ESG developments

This week saw a number of notable developments related to climate risk and other environmental, social and governance (ESG) issues:

  • White House hosts climate summit, releases climate finance plan. Yesterday, during a climate summit with 40 world leaders, the Biden Administration released a new climate finance plan. The plan, which was ordered by a January Executive Order, outlines an intention for the US to increase climate financing to developing countries and pushes federal agencies to prioritize climate adaptation and resilience in investments. Specifically, it directs agencies to shift investment from high-carbon fossil fuel-based energy and promote climate-aligned investment opportunities. At the summit Biden also committed to cutting US greenhouse gas emissions by 50-52% from 2005 levels by 2030.
  • Investment Company Institute supports climate risk disclosures. Yesterday, the Investment Company Institute (ICI), an asset management trade group, issued a statement in support of the Biden Administration’s stated intention to work toward more informative and comparable climate risk disclosures in line with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).
  • Yellen makes climate pledges. On Wednesday, in a speech to the Institute of International Finance, Treasury Secretary Janet Yellen committed to a number of measures to mitigate the impact of climate change including supporting investment in and transition to green technologies through grants and tax credits. She also stressed the necessity of private capital to help meet the cost of climate investments and highlighted the current lack of reliable, consistent and comparable disclosures as a key challenge in attracting private investors. To address that challenge, she pledged that Treasury would work with the SEC on its review of disclosure requirements and indicated support for the TCFD recommendations as well as the efforts of the International Financial Reporting Standards Foundation in establishing a Sustainability Standards Board. Secretary Yellen also discussed the importance and difficulty of managing climate-related financial risks with a confirmation that the Financial Stability Oversight Council (FSOC) would prioritize analysis of those risks this year.
  • Treasury announces climate hub team. On Monday, the Treasury Department formally announced the creation of its new Climate Hub and the appointment of John Morton, formerly the senior director for energy and climate change at the National Security Council during the Obama Administration, as its first Climate Counselor. The announcement states that the Climate Hub will support Treasury’s efforts around 1) climate transition finance, 2) climate-related economic and tax policy, and 3) climate-related financial risks. 

Our Take

The climate finance plan, leaders summit and Secretary Yellen’s intentions for the Treasury Climate Hub are emerging elements of the Biden Administration’s bold plan for managing climate change. The stated emissions goals are highly ambitious and it is not yet clear how quickly or easily these targets will be met. By any measure, achieving these goals will require transformations in the fundamentals of many sectors including transportation and energy - which could mean an acceleration of transition risks as well as opportunities for financial institutions. As such, financial institutions should be identifying and quantifying their exposures to high-carbon industries as they determine their strategies for managing transition risk in those sectors as well as developing financing solutions to support clients in the transition to a low carbon economy.

With Yellen’s comments and support from a major industry group, the growing momentum behind TCFD-aligned disclosures is undeniable. Mandatory standardized climate disclosures would allow for greater transparency and increase pressure for businesses to commit to climate plans and track their progress. As the industry trends toward more mature “investor grade” climate disclosures, firms will need to make their own investments to develop an ESG reporting architecture that is based on reliable data. This will involve setting clear disclosure objectives; defining key metrics using recommendations from TCFD and SASB; identifying underlying data sources; and embedding climate-related information into their data governance models and management processes. Firms will also need to continue growing their ESG expertise to address increasingly nuanced questions around adverse impact as they use climate scenarios to identify material risks that should be disclosed to investors.

OCC Acting Comptroller defends true lender rule

Last week, OCC Acting Comptroller Blake Paulson sent a letter to Senate Banking Chair Sherrod Brown (D-OH) and Ranking Member Pat Toomey (R-PA), urging them to consider the “adverse impact” of reversing the “true lender” rule before voting to do so. The true lender rule is part of a series of actions recently taken by the OCC regarding fintech-bank lending partnerships. Last May, the agency finalized a rule permitting nationally chartered banks to transfer loans to other firms including 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 use their bank partners as cover in order to avoid state requirements. To answer that question, the OCC issued the true lender rule last October, which provides that a bank is the true lender in loans issued by partnerships with fintechs if, on the date of origination, it (1) is listed as the lender in the loan agreement or (2) provides the funding for the loan. The rule also clarifies that in situations where one organization is listed as the lender and another provides the funding for the loan, the organization listed as the lender will be considered the true lender.

The rule was met with disapproval from Democrats, with 22 state attorneys general urging the agency to reconsider the rule, the attorneys general for New York, California and Illinois suing the agency, and Chair Brown introducing a resolution to repeal the rule through the Congressional Review Act (CRA). In response, Acting Comptroller Paulson’s letter argues that repealing the rule would create legal and regulatory uncertainty for loans made under fintech-bank partnerships, and it would also preclude the OCC from issuing a similar rule in the future. He also explains that banks that enter into these partnerships remain subject to the OCC’s regulatory expectations, including credit risk management, model risk management and third party risk management, noting that the true lender rule helps bring fintech lending in line with these expectations.

Acting Comptroller Paulson’s letter comes one week before the Senate Banking Committee is scheduled to meet in a session entitled “The Re-emergence of Rent-a-Bank?”

Our Take

The true lender rule was met with fierce opposition from many Democrats including Chair Brown, but considering the overall relatively rare use of the CRA and the Democrats’ slim Senate majority, it remains to be seen whether it will ultimately meet its end in Congress. In the case that it does get repealed, the issue of determining who the “true lender” is would likely be determined by state-by-state court decisions with potentially uneven results. As such, the Administration’s new yet-to-be-named Comptroller would likely prioritize early in their agenda the development of a new framework that balances the need for regulatory and legal clarity with consumer protection. If Chair Brown does not get the support he needs to overturn the rule, it is likely that the new Comptroller will revisit it to add additional guardrails, potentially by revising the criteria around meeting the definition of “true lender”. With fintech-bank lending partnerships only increasing as a subject of heated debate, expect this topic to play a significant role in President Biden’s selection of a new Comptroller and the resultant confirmation hearings.

It is also important to note that Acting Chair Paulson’s letter included a reference to a Supervision Tip - an OCC internal document disseminated to all of the agency’s examiners - providing guidance for examining lending relationships. As examiners are now equipped to support examining fintech-bank partnerships, expect heightened examiner focus while the issue is being resolved politically.

On our radar:

These notable developments hit our radar over the past week:

  • CME begins publication of forward-looking Term SOFR Reference Rates. On Wednesday, the Chicago Mercantile Exchange (CME) announced the launch of forward-looking term rates of SOFR, the recommended alternative to USD LIBOR. As SOFR is an overnight rate, broadly reflecting the cost of overnight borrowing collateralized by Treasury securities, the calculation of term SOFR rates is based on the trading of SOFR futures. Available in 1-month, 3-month and 6-month tenors, licensing of the rates will initially be limited to cash market transactions. While regulators and working groups do not expect forward-looking term rates to play a significant role in the transition, a number of market participants have noted that term rates could greatly simplify the transition in certain loan products (e.g. trade finance transactions) that require interest payments to be known at the beginning of the interest period.
    Later that day, Alternative Reference Rates Committee (ARRC) Chair and Vice Chairman of Institutional Securities at Morgan Stanley Tom Wipf joined PwC on our latest webcast, Around the World Perspectives on the End of LIBOR. He welcomed the announcement as an important milestone in the transition away from USD LIBOR and acknowledged the CME’s support and alignment to the ARRC’s guiding principles for a forward looking term SOFR, published earlier in the week on Tuesday. Consistent with an ARRC announcement earlier this year, Tom Wipf suggested that the committee would continue to monitor the evolving depth and liquidity of SOFR derivative markets prior to making a formal recommendation for a forward-looking SOFR term rate.
    A replay of Wednesday’s webinar is available here.
    Subscribe to PwC’s LIBOR Transition Market Update here to read more about these and other developments.
  • Gensler staffs up at SEC. SEC Chair Gary Gensler this week announced the appointment of a number of key staff. Among other appointments, former federal prosecutor Alex Oh will serve as Director of Enforcement and Heather Slavkin Corzo, formerly Head of US Policy at ESG-focused group Principles for Responsible Investment, will serve as policy director.
  • Agencies propose income tax allocation agreement rule. Yesterday, the Fed, FDIC and OCC proposed a rule to update and codify guidance on income tax allocation agreements between depository institutions and their affiliates.
  • Crypto trust receives OCC greenlight. Today, cryptocurrency firm Paxos received conditional approval for a de novo national trust bank charter from the OCC. 

Contact us

Julien Courbe

Financial Services Leader, PwC US

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