In the spirit of the new year, we decided to take our Ouija board out of the attic and venture a few predictions for 2016 in financial services regulation. The financial regulatory agencies have been relatively quiet for the last few weeks, but we expect to see significant regulatory activity in 2016. So, we have consulted the spirit of FinReg Nostradamus and assembled a list of some of the regulatory actions that we expect to see this year.
- Incentive Compensation Rules: The financial agencies’ 2011 proposed rules regarding incentive compensation were never finalized, and the agencies are reportedly engaged in discussions regarding the framework of the incentive compensation rules and intend to release a new proposed rule this year. Key issues that the new proposed rule will likely address include triggers for required clawback of compensation and the scope of clawback powers, mandatory compensation deferral requirements and time periods, and application of the rules to alternative compensation arrangements, such as carried interest.
- Net Stable Funding Ratio: Although the Basel Committee on Banking Supervision (Basel Committee) finalized the net stable funding ratio (NSFR) standards of Basel III at the end of 2014, proposed regulations that implement the NSFR have yet to be issued by the US federal banking agencies. The agencies and industry representatives have been engaged in ongoing discussions with respect to the NSFR regulations. Considering the NSFR standards are required under Basel III to be fully implemented by January 2018, barring any unexpected delays, we should see proposed NSFR regulations in the first half of 2016.
- Consumer Financial Protection Bureau (CFPB): A number of rulemakings from the CFPB are expected this year, including long-awaited rulemakings on debt collection and prepaid accounts. We also expect proposed rules on mortgage servicing and on short-term lending (e.g., payday and auto title loans) based on the framework that the CFPB released in 2015. Also on the CFPB’s regulatory agenda for 2016 are mandatory arbitration clauses, checking account overdraft programs, and larger participants in the consumer installment loan and title loan markets.
- Anti-Money Laundering Requirements for Investment Advisers: We expect that the Financial Crimes Enforcement Network will finalize its proposed rules from August 2015 that establish anti-money laundering (AML) program and suspicious activity reporting requirements on certain investment advisers. The lack of AML and customer identification program requirements was noted by the Financial Action Task Force (FATF) in its 2006 evaluation of AML standards in the United States, and FATF is expected to undertake another US evaluation in 2016.
- Marketplace Lending: The Department of the Treasury and the State of California have expressed interest in the rapidly growing “peer-to-peer” or marketplace lending industry. Because most of the marketplace lenders are not licensed at the state level, there is concern about sufficient regulatory oversight. At the same time, the regulatory agencies recognize that marketplace lenders can often provide access to low-cost credit to traditionally underserved markets. We expect continued regulatory interest in this area and possibly more formal proposed regulations or guidelines (although any such regulatory action would likely occur toward the end of 2016).
- More Changes to Basel Regulatory Capital: This is a safe prediction, inasmuch as the Basel accord is a continuing work in progress. The Basel Committee has initiatives in progress on, among other things, the capital treatment of securitization exposures, modifications to the Standardized Approach, and the Fundamental Review of the Trading Book. Hence, we expect to see further significant developments from the Basel Committee in 2016.
- Additional Capital Requirements for the Largest US Banks: Continuing our thoughts on regulatory capital, there will be ongoing discussions, and possibly a final rule, regarding total loss-absorbing capacity (TLAC) and long-term debt (LTD) capital requirements for US banking organizations designated as globally systemically important banks (GSIBs). Currently, eight US banks have been designated as GSIBs.
- Legislative Action on Dodd-Frank: We are neither placing nor taking bets on this item, given the virtually total unpredictability of the current congressional legislative process. But, given that we are now going into a presidential election year, if anything happens in Congress on this front, it will consist of regulatory fixes around the edges, and it will happen earlier, not later, this year.