Financial Services Policymakers Outline Agendas for 2017
Last week, House Financial Services Committee Chairman Jeb Hensarling (R-TX) outlined his ambitious agenda for 2017. At the top of the list is moving forward with the Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act (CHOICE Act), which Chairman Hensarling estimates will be on the House floor early next year. He signaled that he is actively working together with the Trump transition team and is open to making certain changes as necessary. The bill would repeal and replace several parts of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In addition to financial services reform, Chairman Hensarling also plans to revisit housing finance reform, which has been a struggle for Congress to address since the financial crisis of 2008.
Relatedly, it is important to note that Chairman Hensarling has been mentioned as a possible nominee for Treasury Secretary in the Trump Administration, although it seems more likely front-runner Steven Mnuchin will get the nod. While not unexpected, House Financial Services Committee Ranking Member Maxine Waters (D-CA) expressed concern over Hensarling taking Treasury’s top job.
On the Senate side, Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) will lead the Banking Committee next year. With concerns about what the next two years may hold for financial services regulation, Democrats on the Banking Committee recently made clear that they were prepared to push back on Republican attempts to roll back consumer protections, but were open to reconsidering some financial regulations, including regulatory relief for community banks.
House to Vote on SIFI Designation Bill
This week, the House is expected to take up and pass H.R. 6392, Systemic Risk Designation Improvement Act of 2016, which was introduced by Representative Blaine Luetkemeyer (R-MO). The legislation would enhance the criteria used to make Systemically Important Financial Institution (SIFI) designations to ensure that those entities designated as SIFIs, and therefore subject to stricter regulatory standards, are those institutions that are not only large in size, but also globally interconnected and complex.
SEC Chair Participates in Final Oversight Hearing and Prepares to Step Down
On November 15, the House Financial Services Committee held a hearing titled “Examining the SEC’s Agenda, Operations, and FY 2018 Budget Request.” Securities and Exchange Commission (SEC) Chair Mary Jo White, testified at the hearing after announcing the previous day that she will step down from her role before President-Elect Trump takes office in January. The hearing revealed partisan differences over the impact of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and how the SEC should approach the rulemaking process before President-Elect Trump assumes office in January 2017. Republicans urged Chair White to withhold any SEC rulemakings until the Trump Administration is in power, while Democrats pressed her to continue her work on behalf of investors. Both Republicans and Democrats expressed their gratitude and support for outgoing Chair White, who indicated that she would resign at the end of President Obama’s Administration. Specific topics of discussion during the hearing included: (1) SEC funding and resources; (2) “midnight rulemakings”; (3) corporate governance; (4) the Financial Stability Oversight Council (FSOC); (5) the Fiduciary Rule; (6) financial technology (FinTech); (7) high-frequency trading; (8) market structure; and (9) bond market liquidity.
Separately, this Tuesday November 29, the SEC Equity Market Structure Advisory Committee will meet to receive recommendations and updates from its four subcommittees.
CFPB Appealing Decision Ruling its Structure Unconstitutional
On November 18, the Consumer Financial Protection Bureau (CFPB) requested that the District of Columbia Circuit Court grant a rehearing en banc of its decision in CFPB v. PHH Corporation, in which the Court took issue with the constitutionality of the CFPB’s structure in reviewing a dispute that arose over a CFPB administrative law judge’s recommendation of $6.5 million fine against PHH Corporation for allegedly requiring unlawful kickbacks from mortgage insurers in violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA). Subsequently, CFPB Director Richard Cordray overruled the administrative law judge’s recommendation, increasing the fine by a factor of 18 to $109 million for the alleged kickbacks.
On October 11, 2016, the DC Circuit vacated the $109 million enforcement order by the CFPB, finding that not only was its interpretation of RESPA unreasonable, but that the CFPB’s structure is too unaccountable to be constitutional and poses an opportunity for the Director to abuse his power. To remedy this potential for abuse of power, the Court ordered that the CFPB would no longer be an “independent” agency, but “now will operate as an executive agency” and that the President “now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.”
An analysis of the case and the potential policy implications is available here.
FinTech at the Forefront for Federal Regulators as OCC Set to Discuss Possibility of FinTech Charter This Week
On December 2, Comptroller of the Currency Thomas J. Curry will speak on the possibility of granting charters to FinTech companies. Per the OCC’s announcement, Comptroller Curry “will share his perspective on issues related to granting special purpose national bank charters to financial technology companies that provide bank services and products.” Recently, Comptroller Curry referred to FinTech as a “strategic risk” for small banks, warning that they risk falling behind if they do not make room for financial innovation. He has also rejected the idea of a “sandbox” approach to FinTech regulation, which would ease regulatory burdens for startups and new financial products.
Outside of the OCC, other financial services regulators are also interested in regulating the FinTech industry. In fact, the Republican SEC Commissioner Michael Piwowar – who may take over as Chairman in the Trump Administration – recently noted that the SEC “should take the lead regulatory role in the Fintech space.” He highlighted that the potential benefits of Fintech innovations should not be hindered by the SEC’s regulatory structure. The CFPB has also joined in on the regulatory action, adding to tension between banks and FinTech companies over data aggregation by opening the door to possible new regulations in requesting comments on how to prevent banks from cutting off third-party access to consumer data where the customer has given permission.
CFTC Continues Work on Position Limits Amidst Pressure to Wait on Rulemakings
The Commodity Futures Trading Commission (CFTC) recently indicated its intention to continue moving forward with final regulations to place limits on trading positions for energy commodities, though it is uncertain whether the rule will become final before President-Elect Trump takes office. The position limits rule, which intends to curb speculation by investors in the commodity markets by limiting the size of their trading positions, is currently before the CFTC commissioners for their review.
This decision comes amidst pressure for regulators to stop work until President-Elect Trump is sworn in. In fact, House Agriculture Chairman Mike Conaway (R-TX) recently suggested that the CFTC should stop working on any potentially business-unfriendly regulations until President-Elect Trump names a new head of the agency. In addition to the position limits regulations, Chairman Conaway urged the CFTC to table work on automated trading codes and registration rules for large derivatives businesses.
Banking Regulators Prepare for Trump Transition
As 2016 comes to an end, banking regulators are preparing bracing for a Trump Administration. In a recent hearing before the Joint Economic Committee, Federal Reserve Chair Janet Yellen defended the Dodd-Frank Act amid pledges by the incoming Republican-led government to dismantle the law. She cautioned against removing safeguards that help make the financial system safer and protect against the possibility of another financial crisis. Regarding her own future, Chair Yellen noted that she fully intends to serve out her term until it expires at the end of January 2018.
At the Federal Deposit Insurance Corporation (FDIC), the agency recently finalized a rule that will require large banks to keep readily available records of their insured deposits. The final rule requires 38 financial institutions to maintain “complete and accurate” data on each depositor and to build their systems so that the data is accessible within 24 hours of a failure. Banks will have three years – instead of the two years in an earlier proposal – to implement the rule. The final rule also includes different requirements for pass-through accounts, such as indirectly insured brokered deposits and trust deposits. The rule will go into effect April 1, 2017.
Finally, note that President-Elect Trump will have two important banking regulator vacancies to fill during his first year. Comptroller of the Currency Thomas Curry’s term will expire in April 2017 and FDIC Chairman Martin Gruenberg’s term will expire in November 2017. In selecting nominees to fill these posts, President-Elect Trump is likely to face opposition from Senator Elizabeth Warren (D-MA) and other Senate progressives, who can be expected to undertake an effort to block any nominees they view as too in line with Wall Street.