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Our Take: financial services regulatory update - April 30, 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 30, 2021

Biden’s first 100 days

Yesterday, President Biden marked his 100th day in office with his first address to a joint session of Congress. His speech centered around the American Jobs Plan that emphasizes the employment opportunities in his Administration’s infrastructure and climate change mitigation plans. It also focused on the new American Families Plan that would aim to provide greater access to education and child care through tax increases on corporations and individuals earning over $400k.

Despite the absence of financial regulation in President Biden’s speech, it is still possible to take stock of what has changed in this area over the last 100 days and what is yet to come. Biden’s appointments to the financial services agencies are on pace with those of President Trump - both saw early confirmation of their Treasury Secretary nominee and had their SEC Chairman in place close to their 100th day. Biden’s CFPB Director nominee is awaiting full Senate confirmation and there have not yet been nominations announced for the OCC Comptroller, CFTC Chair, or the sole Fed Governor vacancy. One early major area of financial services focus for the Administration through both confirmed and acting agency heads has been environmental, social and governance (ESG) issues, particularly climate change. This has played out through actions such as the White House announcing a climate finance plan and agencies including Treasury, the Fed, the SEC and the CFTC creating climate-focused divisions or hiring dedicated advisors. The SEC in particular has taken a number of steps toward escalating enforcement of ESG-related claims and enhancing disclosures. 

Our Take

In the 100 days since his inauguration, President Biden has - as expected - focused more on the federal government’s pandemic response, infrastructure, racial injustice, and the environment than financial regulation. As we predicted, early advances in the financial services space have focused on ESG, and we expect that to continue with a growing likelihood for enhanced mandatory climate disclosures from the SEC - particularly with a confirmed Chair and Democratic majority now in place at the Commission.

Looking ahead, as the vaccine rollout continues and relief measures demonstrate impact, the Administration should be able to devote greater attention to other policy areas including financial services. Getting appointees in place at the OCC and CFPB in particular should illuminate positions on chartering fintech companies and the growth of AI in financial services. In addition, having a confirmed CFTC Chair will enable the Administration to move forward in developing a regulatory framework for cryptocurrency and determining to what extent it will harmonize SEC and CFTC requirements with international regulators. We will likely see more changes to banking regulations and policies following the end of Randal Quarles’s term as Fed Vice Chair for Supervision this October.

While the razor thin Democratic majority has eased Biden’s ability to have his appointees confirmed, the delays in formally announcing nominees for remaining vacancies illustrate that it is still difficult to achieve consensus when any one Democratic Senator has an effective veto. In particular, Senate Banking Committee Chairman Sherrod Brown (D-OH) and Senator Elizabeth Warren (D-MA) will be able to block potential appointees to the OCC, CFTC and Fed who they consider to have too close of ties to the industry. Regardless of who is ultimately appointed and confirmed to these positions, it is already clear that the Administration, via Treasury Secretary Janet Yellen as the head of the Financial Stability Oversight Council (FSOC) will continue to push a focus on climate change well beyond these initial 100 days.

Stay tuned as Our Take continues to track these issues and more.

For more on actions taken by the financial regulators to combat climate change, see Green light: FS warms up to climate risk.

Crypto on the march - again!

Last week, the OCC granted preliminary conditional approval to the first de novo national trust bank dedicated to digital assets. This follows approval earlier this year of two digital asset firms applications to convert a state trust charter to a federal trust charter, making this now the third digital asset firm to receive a federal green light.  Similar to the first approval, the charter will be subject to an Operating Agreement and a Capital and Liquidity Management Agreement, yet to be executed. Meanwhile, last Thursday the Governor of Wyoming signed into law a bill to permit decentralized autonomous organizations (DAOs) to organize under the state’s limited liability corporations statute. A DAO is a decentralized application that conceptually builds on smart contracts, enabling financial contracts to be entered into and executed automatically and autonomously - that is, without the intervention of a financial intermediary. Congress recently took action in this space as well, with the House passing the first piece of legislation touching digital assets, the Eliminate Barriers to Innovation Act of 2021. The bill, now under review with the Senate Banking Committee, would direct the SEC and CFTC to jointly establish a digital asset working group to analyze and make recommendations regarding the regulatory treatment and framework for digital assets. 

Our Take

The chartering of a de novo crypto institution could provide a path for state money transmitter licensed crypto businesses to find a new home in the federal trust charter, establishing the trust business model as viable for activities that had previously only been done under state Money Services Business (MSB) licenses. This is not the first time a financial services company has opted for a federal trust charter at the expense of state MSB licenses, but it is the first time a digital asset firm has done so. Opening the path to de novo chartering further expands the range of licensing opportunities for digital assert firms. While the OCC action further expands the charter options for crypto, the action by Wyoming breaks new ground altogether as permitting DAOs to act with legal personhood will arguably bring the self-executing promise of decentralized finance closer to reality. There has been no shortage of action among the chartering authorities at the state and the federal level, but the pending legislative mandate for the functional regulators would be entirely new. To date, federal regulators have been marching largely to the beat of their own drum, and while they have occasionally worked together to develop policy responses, formal coordination has been lacking.

On our radar:

These notable developments hit our radar over the past week:

  • ARRC announces symposium on the transition from USD LIBOR to SOFR. On Wednesday, the Alternative Reference Rates Committee (ARRC) announced the next webinar in its series “The SOFR Symposium: The Final Year” for May 11, 2021. The event will feature remarks from Andrew Bailey, Bank of England Governor, and John Williams, New York Fed President and CEO, who serve as co-chairs of the Official Sector Steering Group at the Financial Stability Board (FSB). Additional agenda topics are expected to include developments in the loan markets and forward looking term SOFR.
    Subscribe to PwC’s LIBOR Transition Market Update here to read more about this and other developments.
  • Fed issues supervision and regulation report. Earlier today, the Fed released its semiannual supervision and regulation report. The report describes the financial and operational resilience demonstrated by the industry throughout the pandemic-related crisis but indicates that certain weaknesses remain including slowed bank lending activity and decline in net interest margin. The report also highlights increasing supervisory focus on firms’ transitions away from LIBOR.
  • Senate Banking Committee holds true lender rule hearing. Yesterday, the Senate Banking Committee held a hearing entitled “The Reemergence of Rent-a-Bank?” The hearing heard from former OCC Comptroller Brian Brooks as well as representatives from academia, consumer groups and state governments. In general, the witnesses (aside from Brooks) and Democrats criticized the OCC’s true lender rule as a way for fintechs to evade state interest rate caps, while Brooks and Republicans defended the rule as an expansion of access to credit and elimination of regulatory uncertainty. For more on the true lender rule, see our recent Our Take.
  • SEC Director of Enforcement steps down.  On Wednesday, SEC Director of Enforcement nominee Alex Oh announced that she is resigning from her position as Director of Enforcement after being appointed to the position last week. 

Contact us

Julien Courbe

Financial Services Leader, PwC US

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