Congress Isn’t The Only Game in Town: Checking in on the Regulators
While we are now a little more than two weeks out from a potential government shutdown and the expiration of a handful of other vital government programs, it is worth remembering that while members of Congress get most of the attention in Washington, they aren’t the only policymakers in the nation’s capital.
Financial services companies can expect several significant rulemakings from regulators this fall. Even the Supreme Court will be busy with matters that will impact the industry.
Starting with the nation’s highest court, let’s take a look at what the industry can expect from the other two branches of government between now and the end of the year.
Oct. 3: Supreme Court will hear CFPB case
As Reuters’ John Kruzel reported this week, “the CFPB faces an existential threat” in a case brought five years ago by two trade groups representing the payday loan industry. (The two groups, the Community Financial Services Association of America and the Consumer Service Alliance of Texas, launched their lawsuit after the CFPB issued a rule to curb allegedly unfair and abusive payday lending practices.)
The case will be argued before the highest court in the land on Oct. 3.
At the heart of the case is how the CFPB receives its funding. Specifically, the CFPB operates using money from the Federal Reserve; it does not have to rely on Congress for appropriations. As Kruzel noted, CFPB opponents argue this “‘perpetual budget’ violates the U.S. Constitution, which gives spending authority in Congress. A federal appeals court agreed with that argument last year and now the Biden administration is appealing.
Reuters’ Kruzel said if the CFPB loses the case it “could grind the agency’s operations to a halt.” (Kruzel also noted the Supreme Court’s current 6-3 majority has routinely ruled against federal regulators in cases challenging their authority.) It will be several months before we know if that will happen in this case, however. The court is not expected to issue a ruling until next June.
But the CFPB has not let this “existential threat” slow its agenda.
A fall hat trick from the CFPB
The CFPB is expected to issue at least three significant rulemakings this fall.
Nearly a year after releasing an outline of its draft rule, the Bureau should propose its Section 1033 “open banking” regulation which is meant to strengthen consumers’ access to, and control over, their own financial data. Under last year’s draft, the CFPB said consumers “would be able to more easily and safely walk away from companies offering bad products and poor service,” creating “a marketplace where companies would need to improve their offerings to keep their customers.”
Unlike many CFPB proposals, the open banking rule is relatively noncontroversial. Republicans and Democrats, banks and fintechs, consumer advocates and industry stakeholders all believe the Bureau’s forthcoming rule on open banking could be a big deal for Americans. Even so, if the Supreme Court rules against the CFPB’s funding mechanism, this regulation could be caught in the crossfire.
A potential proposal concerning data brokers does not enjoy the same broad support as the CFPB’s open banking rule.
This past March, the CFPB launched a public inquiry into the data broker industry and into collection and sale of consumer information. It took comments on the issue until July 15. At a conference at the White House a month later, CFPB Director Rohit Chopra said the CFPB intends to issue a draft regulation “to ensure that modern-day digital data brokers are not misusing or abusing our sensitive data.”
We expect the CFPB to convene a small business panel to provide input on a draft rule this fall, with a proposed rule expected early next year. The Bureau cannot wait much longer than that since any delay would increase the likelihood the CFPB would not get the rule finished before Election Day 2024. (If a Republican takes over the White House, this rule — regardless of what the Supreme Court decides about the CFPB — will not stick.)
The third leg of the CFPB’s hat trick is its overdraft fee rule, which would amend Regulation Z. The CFPB has indicated it should have this draft ready by November.
Republicans already have warned Director Chopra he should think twice before issuing this rule. In a letter sent in February, House Financial Services Committee (HFSC) member Rep. Blaine Luetkemeyer (R-Mo.) said, “The bottom line is overdrafts are not and should not be included in Reg Z. Paying consumers’ occasional or inadvertent overdrafts is a long-established customer service provided by depository institutions. The Federal Reserve recognized this longstanding practice when it initially adopted Regulation Z in 1969.”
These three rulemakings are not the only issues on the CFPB’s radar, of course. Over the next several months the Bureau also could address: buy-now-pay-later, earned wage access, liability for peer-to-peer payment fraud, nonbank registrations, fees for insufficient funds, credit card penalties, and whether to issue new rules to increase oversight of credit reporting agencies.
But wait there’s more! While the CFPB is one of the busiest federal agencies, there is plenty of action elsewhere too.
Controversial SEC ESG rule coming soon
In May 2022, the U.S. Securities and Exchange Commission (SEC) issued draft rules that would require enhanced disclosures by public companies about their environmental, social, and governance (ESG) practices.
The SEC is expected to finalize these rules in October. Under the draft, domestic or foreign registrants would need to include information in registration statements and periodic reports pertaining to:
Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook;
Their governance of climate-related risks and relevant risk management processes;
Their own greenhouse gas emissions;
Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and
Information about climate-related targets and goals.
A separate rule would have significant repercussions for private funds, private wealth advisers, and broker-dealers. It would:
Require additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures;
Implement a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance; and
In general, require certain environmentally focused funds to disclose the greenhouse gas emissions associated with their portfolio investment.
In a hearing this summer, HFSC Chairman Patrick McHenry (R-N.C.) said, “[W]e must address the burdensome climate reporting and other requirements imposed by the Biden administration. ...The SEC is not a climate regulator nor has Congress authorized it to mandate environmental policy via the disclosure regime.”
Expect a flurry of lawsuits once this rule makes it to the finish line. Republicans also have made this matter an Election 2024 issue. A GOP president would seek to immediately revoke this rule and a Republican Congress also would try to undo it using its Congressional Review Act authority.
FTC to crack down on consumer reviews
In June, the FTC issued a draft rule to crack down on consumer reviews, which the FTC said could be used to “deceive consumers looking for real feedback on a product or service.”
To curb these practices, the FTC proposal would prohibit businesses from:
Writing or selling consumer reviews or testimonials by someone who does not exist, who did not have experience with the product or service, or who misrepresented their experiences, and procuring such reviews or disseminating such testimonials if the businesses knew or should have known that they were fake or false;
Using or repurposing a consumer review written for one product so that it appears to have been written for a substantially different product;
Providing compensation or other incentives for positive reviews;
Allowing company officers and managers to write reviews or testimonials of its products or services without clearly disclosing their relationships;
Disseminating testimonials by insiders without clear disclosures of their relationships;
Creating or controlling a website that claims to provide independent opinions about products or services that includes its own products or services;
Using unjustified legal threats, other intimidation, or false accusations to prevent or remove a negative consumer review;
Saying reviews on its website represent all reviews submitted when negative reviews have been suppressed; and
Selling false indicators of social media influence, like fake followers or views.
Christine Wilson, the only GOP commissioner currently sitting on the FTC, voted against proceeding with the proposal. (Republican lawmakers have heavily criticized the FTC under the leadership of Lina Khan. They even have gone after the FTC for what they view as rank hypocrisy: in August GOP lawmakers vowed to crack down on the FTC for “allegedly destroying documents related to a congressional probe.”) The FTC could finalize its consumer review rules early next year.
These rules are just a sampling of what is being written at federal agencies. In the run up to Election 2024, the Environmental Protection Agency, Department of Transportation, and other agencies will rush to finalize significant non-financial services rulemakings ahead of a potential swing in control of the Executive Branch.
So gear up for a busy fall – and an even busier 2024.