With President Biden’s cabinet taking shape, regulated entities in the financial services industry like banks, specialty lenders and capital markets firms are starting to get a better picture of what changes might be in store.
For these firms, the question is no longer if regulations will change, but how much they will change.
With control in the Senate split evenly, the tiebreaker falls to the vote of Vice President Kamala Harris, giving Democrats a slim margin to advance their regulatory agenda. The narrowness of the margin may be enough to slow some of the more sweeping and progressive regulatory policy proposals. Still, it is important to remember that even a slim majority can carry power to make such changes.
This change in power will be no more evident than in the Senate Committee on Banking, Housing and Urban Affairs, where Senator Sherrod Brown, Democrat of Ohio, will take over as the chairman.
Among the committee’s changes will almost certainly be more oversight of the nation’s largest banking organizations. Yet the increased scrutiny is less likely to be centered on the risk that these institutions pose to the financial system, as it was following the financial crisis when Democrats last held the majority in the Senate.
This time around, the committee’s agenda will most likely focus on protecting and promoting consumer well-being, reaching the nation’s unbanked or underbanked population, reversing the Trump administration’s relaxation of regulations, enhancing or improving existing regulations, and focusing on climate change.
But just as important as the committee’s agenda will be who runs the regulatory agencies. The Senate approves the agency heads who will be responsible for regulating banking, specialty lending and capital market organizations.
Here’s a look at five agencies and how regulations are likely to change at each under new leadership.
Securities and Exchange Commission (SEC)
Gary Gensler, who led the Commodities Futures Trading Commission from 2009 to 2014, has been nominated to lead the SEC. Under Gensler, organizations can expect:
- Increased enforcement of existing regulations, which were relaxed under the Trump administration.
- Greater emphasis on climate change as more uniform disclosure requirements for public company financial reporting becomes the norm.
- Review of complex investment products, SPACs and direct listings as they gain greater traction with investors and market participants.
- A new focus on digital assets, which will have increased oversight coupled with new rules to fill gaps in the current regulatory framework.
Consumer Financial Protection Bureau (CFPB)
Biden has nominated Rohit Chopra to lead the CFPB. Under Chopra, the agency will be much more active than it was during the Trump administration. Important objectives will likely include:
- Stronger consumer protections, with a focus on unfair, deceptive or abusive practices, and tougher enforcements likely for rule violators.
- A reinvigorated Office of Fair Lending with a return to more aggressive penalties targeting discriminatory practices that existed before a 2017 change under the agency’s director at the time, Mick Mulvaney.
- Stricter rules on payday lenders, including a push to impose an interest rate cap on consumer loans (which would be another reversal from Trump-era rules).
Office of the Comptroller of the Currency (OCC)
Biden nominated Michael Barr to lead the OCC. Barr, notably, was a former Treasury official who played a role in crafting the Dodd-Frank Act of 2010. With Barr leading the OCC, agenda items will likely include:
- Reopening the Community Reinvestment Act (CRA) rule that was approved by the OCC in May 2020 in order to, among other objectives, modernize the act, increase enforcement of the act as well as work with other regulatory agencies to expand its reach into nonbanking sectors.
- Putting the brakes on the fair access rule, which would bar banks from refusing to serve controversial businesses. The rule was approved by the agency in January and Barr could reopen the rulemaking process, leading to changes or a reversal of the rule altogether.
- Reviewing the agency’s approach to digital assets, such as the agency’s recent interpretive letters on cryptocurrency and digital asset custody. Although these rules may not be overturned, the agency is likely to make a concerted effort to maintain the banking system’s integrity in light of these new industry participants.
- Strengthening oversight of larger banks while simultaneously pushing nationally chartered banks to find ways to bring the unbanked into the banking system.
Commodity Futures Trading Commission (CFTC)
Biden is expected to nominate Chris Brummer to lead the CFTC, according to Reuters. This would be the second time Brummer has been considered for the top post at the CFTC; his appointment expired in 2016 without a vote. If appointed this time, Brummer’s priorities would likely include:
- Continuing the recent uptick in enforcements under former President Trump, but likely at an accelerated pace.
- Reviewing key rules, such as the cross-border rule, swap dealer capital rule and position limits rule. Revisions, if not full rewrites, of these rules may lead to stricter requirements.
- Increasing transparency in reporting and disclosing information surrounding swap transactions as a result of greater enforcement of Title VII rules.
While regulatory supervision at the Fed is not likely to change immediately, it is worth noting that the term for the vice chairman for supervision, Randal Quarles, ends in October. Although he has time remaining, it is likely that the focus of regulation at the Fed will shift once an ally of Biden is appointed. Areas of focus in this scenario likely include:
- Addressing the use of artificial intelligence to ensure that this rapidly evolving technology isn’t leading to discriminatory outcomes in areas like consumer lending.
- Elevating the importance of climate change, and diversity and inclusion, in the Fed’s regulatory framework through possible revisions to existing rules. These could include requiring more uniform and robust disclosures of institutions surrounding their efforts related to each initiative.
The Biden administration’s priorities are coming into focus, and they include new initiatives and regulatory course corrections at individual agencies. While it may take some time for certain initiatives to take hold, the previous administration’s accommodative regulatory environment and the lack of emphasis on social matters–in areas like climate change, racial inequality, and diversity and inclusion–will change. And they will change quickly.
Planning for these broader administrative initiatives is a logical step for regulated entities to reduce their impact in the future.