Our take: financial services regulatory update - June 12, 2020

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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 - June 12, 2020

Agencies continue to offer relief and flexibility for crisis management

This week, the financial services regulatory agencies have continued to take actions to support the economy and markets in response to heightened volatility and uncertainty. Specifically:

6/12 - Fed - The Federal Reserve (Fed) released its latest semiannual Monetary Policy Report. The report discusses the impact of the substantial disruption to economic activity over the last several months and the responses the Fed has undertaken. It also notes a number of remaining concerns around less accommodative lending standards for households and businesses, deteriorating liquidity conditions in foreign financial markets, more severe job losses for low-wage workers, and the potential for widespread failure of small businesses. Fed Chair Jerome Powell will testify on the report to the Senate Banking Committee and the House Financial Services Committee next Tuesday and Wednesday, respectively.

6/11 - SBA & Treasury - The Treasury Department and Small Business Administration (SBA) published revisions to the interim final rule implementing the Paycheck Protection Program (PPP) and updated borrower and lender application forms to reflect the new forgiveness, loan maturity and payment deferral provisions signed into law last week.

6/10 - CFTC - The Commodity Futures Trading Commission (CFTC) extended the end-date of no-action relief issued in response to the crisis from 6/30/20 to 9/30/20. The relief was originally announced on 3/17/20 and allowed a number of market participants to remain compliant with CFTC requirements while working remotely.

6/10 - Fed - The Fed released its latest economic projections, including a 6.5% contraction of GDP and a 9.3% unemployment rate for 2020. Fed Chair Powell also gave a press conference during which he said:

  • The Fed is “not even thinking about thinking about raising rates” through 2022.
  • He expects millions of people to not return to jobs they lost recently.
  • He expects the Main Street Lending Program (MSLP) to open soon without any further changes, but that there may be more down the road.
  • There is no way to know if the May jobs data indicates that the economy has hit bottom.
  • The economy will continue to need fiscal stimulus.

6/10 - SBA & Treasury - Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza testified before the Senate Small Business Committee. Highlights include:

  • Businesses have returned $12 billion in PPP loans.
  • Mnuchin said the names of recipients and amounts of funding received will not be made public.
  • Carranza said 45% of PPP loans were disbursed in low income areas.
  • Mnuchin said he supports further fiscal stimulus that addresses unemployment benefits, incentives for business to rehire employees, and aid for states.

6/8 - Fed - The Fed announced that it will expand the MSLP to allow more small and medium-sized businesses to participate. The changes include:

  • Lowering the minimum loan size for certain loans to $250,000 from $500,000
  • Increasing the maximum loan size for all facilities
  • Increasing the term of each loan option to five years, from four years
  • Extending the repayment period for all loans by delaying principal payments for two years, rather than one
  • Raising the Fed’s participation to 95% for all loans (from 85% for Priority Loans)

The Fed will host a webinar for these changes on Monday at 2 pm EDT.

6/8 - FRBNY - The Federal Reserve Bank of New York (FRBNY) updated the FAQs for the Term Asset-Backed Securities Loan Facility (TALF).

6/8 - SBA & Treasury - The Treasury Department and SBA issued a statement on the recently passed PPP changes clarifying that businesses that use less than 60% of their funds on payroll will still be eligible for partial forgiveness. They also released additional details on loan approvals through June 6th including names of top lenders and recipient industries.

Our take

This week saw the Fed paint a picture of a highly uncertain economic recovery for the foreseeable future. Chair Powell reconfirmed that the Fed will keep rates near zero as long as it is needed, but he has been consistent in his view that the Fed’s actions alone will not likely be enough to ensure a strong recovery. Although he has been reluctant to explicitly direct Congress to act, it is clear that he believes more fiscal stimulus is needed. However, signs from Congressional leadership indicate that any consensus on a fourth relief package is unlikely until well into July - particularly as we have yet to see whether the (relatively) positive trend in employment statistics from May will continue. Another factor inhibiting a rush for more stimulus is the fact that much of the funding allocated for business lending in the CARES Act has yet to be used. While Powell indicated that the MSLP will launch soon, it remains to be seen whether this week’s expansion will be enough to cover the persistent need for funds across many sectors of medium-sized businesses. On the small business front, there is also still over $130b of PPP funding remaining in the coffers. Last week’s uptick in demand has continued this week with 41,690 new loans totalling $897m but this is still a much slower rate of lending than in the first month of the program. If new lending continues to be slow while evidence from the Fed’s Monetary Policy Report indicates that risk to small businesses remains high, we could see some additional tweaks to PPP and the MSLP to ensure that businesses in need of funding are able to get it.

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Department of Justice sets out new compliance expectations for financial crime programs

Last week, the Department of Justice (DOJ) released updated guidance for prosecutors to consider when they evaluate compliance programs in deciding whether to bring charges or negotiate plea bargains. First issued in 2017, the DOJ’s guidance now provides a broad set of principles to evaluate whether a firm’s compliance program is: 1) well-designed, 2) applied in good faith, and 3) works in practice. In contrast with previous versions of the guidance, the updated version calls for a more tailored approach, encouraging prosecutors to consider the broader context of  the design or actions of compliance programs, including whether decisions were made to avoid conflicts with foreign laws. To enable this more tailored approach, the guidance notes that companies will need to conduct risk assessments that incorporate lessons learned not only from their own experiences, but also from their industry peers. It further explains that the risk assessments should be continuously updated using relevant sources of data. 

Our take

The DOJ’s updated guidance reflects the regulatory trend of emphasizing that compliance expectations should be based upon an individual firm’s risk profile rather than a one-size-fits-all approach. This will come as a relief to firms making good-faith efforts to properly mitigate complex anti-money laundering and sanctions-related risks as they will be better able to demonstrate that any violations were not willful. However, this does not mean that firms are off the hook. The increased emphasis on a risk-based program means that firms — particularly those operating in high risk sectors — must be prepared to show that they are proactively taking steps to understand and mitigate their risk. The DOJ makes clear that this includes keeping informed of issues at peer firms and using data analytics, so organizations that are lagging behind in developing analytics capabilities for their AML and sanctions programs should act now.

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On our radar

These notable developments hit our radar this week:  

1. House introduces resolution to use CRA on CRA. Yesterday, House Financial Services Committee chair Maxine Waters (D-CA) and Subcommittee on Consumer Protection chair Gregory Meeks (D-NY) introduced a resolution that would reverse the OCC’s recent Community Reinvestment Act (CRA) reform rule using Congressional Review Act authority. If the resolution passes in the House, it would then have to be approved by the Republican-controlled Senate and signed into law by the President, making its chances of eventually overturning the rule unlikely. 

2. EU proposes to exempt US clearinghouses from foreign regulation. Yesterday, the European Commission released a draft of an act that would clarify rules for US clearinghouses operating in the EU, specifically noting that they would not be subject to new requirements under the EU’s European Market Infrastructure Regulation. In response, CFTC chair Heath Tarbert issued a statement expressing his appreciation and pledging that the agency will look into additional ways it can provide deference toward EU market participants.

3. LIBOR transition: Publication of SONIA index to begin in August. On Thursday, the Bank of England announced that it will begin publication of a daily index based on compounded SONIA, the recommended alternative for GBP LIBOR, in early August. The publication of the index is intended to further promote the use of SONIA in financial products by simplifying the calculation of compounded interest rates. The FRBNY has been publishing a similar index based on compounded SOFR, the recommended alternative for USD LIBOR, since March of this year. For more information on this and other LIBOR transition topics subscribe to our biweekly update here.

4. Fed releases report on public perspectives. Today, the Fed released a report summarizing 15 Fed Listens events held since the beginning of 2019 to understand perspectives from the public on Fed activities and the effects of the crisis. Key takeaways included:

  • Participants from underserved communities indicated that “hot” labor market conditions in 2019 were not fully reflected in their areas and that they did not feel affected by changes in interest rates due to lack of access to conventional credit.
  • Business representatives reported difficulty finding workers in the 2019 labor market and having to absorb the costs of offering enhanced benefits.
  • Retirees reported the importance of price stability on their financial well being and not understanding the Fed’s goal of somewhat higher inflation.
  • Most participants agreed that the Fed should do more to communicate with and reach people across the country.

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Julien Courbe

Financial Services Leader, PwC US

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