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Our take: financial services regulatory update - November 6, 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 - November 6, 2020

Election 2020: The stakes for financial services

Three days after Election Day, here’s what we know: former Vice President Biden leads narrowly in the key swing states of Arizona, Nevada, Pennsylvania and Georgia, while final votes continue to be counted. The President has already mounted legal challenges, cast doubt on the legitimacy of the election, and called for recounts. It is also clear that neither the Republicans nor the Democrats will win the Senate with significant margins, and control of the chamber is likely to hinge on two January 5 run-offs for both seats in Georgia. With this uncertainty remaining, questions turn to how the next four years could be different from the last.

Our take

With a possible blue Presidency and red Senate, we may have purple reign for at least the next two years. A potential Biden administration could be significantly limited by a Republican-held Senate both in terms of the prospect for legislation and the confirmation of cabinet and senior agency nominees. While speculation around potential key financial services cabinet picks has ranged from bank CEOs to regulatory crusaders, we believe that Biden would largely stick to moderate, consensus-driven nominees for his cabinet and regulatory agencies. As these moderate picks would help drive his financial services policies, we anticipate that his administration would focus on incrementally strengthening consumer protection as well as environmental, social and governance (ESG) standards as opposed to unwinding the Trump Administration’s reforms or pursuing a more aggressive rulemaking agenda.

See Election 2020: The stakes for financial services for a more in depth look at what we expect from either a second term for President Trump or a Biden Presidency.

Regulatory agencies release operational resilience paper

Last Friday, the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) jointly published a paper outlining practices to enhance operational resilience. The paper does not constitute new regulation or supervisory guidance, but it synthesizes existing resiliency-related guidance and indicates continued regulatory interest in this area. The paper outlines best practices for topics such as operational risk management, cybersecurity, and scenario development and is targeted to US banks with more than $250 billion in total consolidated assets or more than $100 billion in total assets and other risk characteristics. One notable inclusion in the paper that has been previously absent from regulatory guidance is a discussion of cloud technology as an opportunity to strengthen operational resilience but also a third-party risk that must be mitigated. 

The paper comes as the latest in a series of guidance and other releases on operational resilience from regulators in the US and abroad. In 2018, UK regulators released an operational resilience discussion paper highlighting best practices followed by a consultation paper with specific proposals for requirements that firms determine critical functions, set impact tolerances and establish controls and procedures to mitigate risk. Meanwhile, US federal regulators have updated their business continuity management handbook to include operational resilience considerations, and the Basel Committee on Banking Supervision (BCBS) released a set of principles earlier this year.

Our take

Operational resilience has been growing as a focus area for the industry and regulators alike over the past several years, with high-profile cybersecurity incidents and natural disasters highlighting the importance of being able to continue and quickly restore business services. The timing of the agencies’ paper - during a global pandemic where firms have had to shift to remote work - underscores just how critical it is to be able to prepare for unexpected challenges and adapt quickly to maintain service. Although firms have had access to previous guidance highlighted in the paper, some have not yet integrated it into a single framework and approach. As such, they should closely review the practices outlined in the paper against their existing operational resilience strategy and anticipate these themes in their interactions with regulators. While there are some differences in the global regulators’ approaches, such as the US regulators’ paper focusing on internal risk appetite compared with the UK regulators’ focus on firms considering the potential impact to consumers and the community, the authorities are converging on a unified mindset that resilience needs to improve across the board.

Stay tuned for our First take with more detail on this report next week.

DOL finalizes rule on ESG investing

Last Friday, the Department of Labor (DOL) issued a final rule to clarify their position on how retirement plan managers can integrate environmental, social, and governance (ESG) considerations into their investment processes. The rule is intended to ensure that retirement account managers focus on returns rather than ESG factors as investment criteria by requiring that they select investments based solely upon “pecuniary factors” - i.e., those factors that have a material impact on risk or returns of an investment. The DOL explains that ESG issues do not constitute pecuniary factors unless they can be proven to have a direct financial impact on the fund strategy.

The rule will be effective 60 days after publication in the Federal Register, and retirement plan managers will have until April 30, 2022 to demonstrate compliance.

Our take

While regulators both in the US and abroad are taking steps to encourage ESG investment and incorporation of climate change into risk management, the DOL is saying “not so fast.” Predictably, Congressional Democrats and sustainable investment groups have voiced their opposition to the rule, and especially noteworthy is that the asset management industry is also overwhelmingly opposed to it with 85 firms sending letters of dissent to the DOL. Depending on the final result of the election, this could be an early target for a potential Biden Administration to vacate. In the meantime, the DOL has made it much harder for asset managers to navigate aligning climate-friendly investment strategies with the financial interests of their clients.

On our radar

These notable developments hit our radar over the past week:

1. Crisis response continues. Over the past week, the federal regulatory agencies continued to take steps to support the economy while Congress remained deadlocked on relief. Specifically:

  • Earlier today, the New York Fed announced that is has selected additional counterparties to support the Commercial Paper Funding Facility and the Secondary Market Corporate Credit Facility.
  • On Monday, the New York Fed issued updated Term Asset-Backed Securities Loan Facility FAQs.
  • On Monday, the Congressional Oversight Commission released a report on the implementation of the Main Street Lending Program.

2. Fed Supervision and Regulation Report. Today, the Fed released its latest semiannual Supervision and Regulation Report. This issue discusses the Fed’s response to the crisis and also provides insight into its view on climate change risk and supervisory priorities.

3. SEC updates exempt offering framework. On Monday, the SEC voted to amend its rules governing “exempt offerings,” which refers to issuances that meet certain exemptions from registration or disclosure requirements. The new rules raise limits on the amount of funds that may be obtained through such offerings, allow companies to make exempt offerings every 30 days rather than six months, and provides more room for companies to “test the waters” by communicating with investors prior to making offerings.

4. FINRA adopts rule to limit conflicts of interest. Last Friday, FINRA adopted a rule that would prohibit an associated person with a registered firm from being named a beneficiary of a customer’s estate, receiving a bequest from a customer’s estate, or being named an executor or trustee of an estate unless they receive prior written approval from the broker-dealer. The rule will become effective on February 15, 2021.

5. LIBOR Transition. Two items hit our radar this week:

  • ARRC seeks guidance on capital and liquidity impacts of LIBOR transition. On Monday, the ARRC published a memorandum to the Fed, FDIC and OCC on capital and liquidity regulatory considerations with respect to the transition from LIBOR to alternative reference rates (ARRs). The ARRC is suggesting that regulators and market participants should collaborate to avoid unintended effects of the transition that might discourage the adoption of ARRs. The memorandum includes a series of recommendations for guidance and relief in areas such as historical data requirements, recalibration of regulatory capital and liquidity requirements and treatment of contractual amendments for capital purposes.
  • Regulators reiterate guidance on LIBOR replacement rates. Earlier today, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (collectively, the agencies) issued an interagency statement on reference rats for loans. The statement reiterates that “a bank may use any reference rate the bank determines to be appropriate for its funding model and customer needs” but also reminded market participants that all lending contracts should include robust fallback language to specify a replacement rate in case the initial rate ceases to be published.
    The statement follows a previously released letter to the participants of the Credit Sensitivity Group (CSG) workshops, organized by the FRB NY, which declared that the official sector did “not plan to recommend a specific credit-sensitive supplement or rate for use in commercial lending products.” The workshops had been convened in response to concerns raised by a number of regional banks about the suitability of SOFR as a lending rate, amid fears that SOFR might not accurately reflect their funding costs — especially in stress periods.

Subscribe to PwC’s LIBOR Transition Market Update here to read more about these and other developments.

Contact us

Julien Courbe

Financial Services Leader, PwC US

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