Biden’s U.S. Regulatory Focus: Consumer Protection, ESG, Minority Lending; Gensler Gets Early Role; Senate Outcome Key

Henry Engler, Senior Editor at Thomson Reuters Regulatory Intelligence, offers this analysis of President-Elect Joe Biden's priorities on the regulatory front once he becomes the 46th President of the United States. Although still early in the transition, some believe that regulation of the financial sector will not be a focus out of the gate.

Financial regulation issues will be lower on the list of a near-term policy objectives under a Joe Biden administration that will be dealing first and foremost with the worsening COVID-19 pandemic and uncertain economy, experts predicted. Still, many expect the top regulatory agencies to focus their agendas more on consumer protection, social and environmental concerns and lending to minority communities once a new U.S. leadership takes shape under the Demcratic former vice president.

Biden is already reported to have tapped a seasoned regulator, former Commodity Futures Trading Commission chair Gary Gensler, to lead his transition planning for financial industry oversight.

Biden won last week's presidential election after capturing the battleground state of Pennsylvania, which according to major-media network projections on Saturday pushed him over the 270 electoral votes needed to secure the White House. Whether Democrats can capture the Senate remains uncertain, with four races still undecided, including two in Georgia that will not be resolved until runoffs in January. If Republicans keep control of the U.S. Senate, they would likely block large parts of his legislative agenda, including those on financial regulation. President Donald Trump has yet to concede, and plans legal challenges that analysts give little chance of succeeding.

In many ways, the current period has echoes of 2008, when the financial crisis plunged the U.S. economy into the depths of a recession not seen since the Great Depression. At the time, the newly elected Obama administration was immediately thrown into crisis mode. Today, with millions of Americans still unemployed and the pandemic unleashing soaring rates of infection across a broad swathe of the country, “crisis” is again the operative word. Everything else can wait.

“In some ways it’s similar to 2008 from an economic policy perspective. They’ve got to jump start the economy first, and worry about more dogmatic policy prescriptions second,” said Matthew Kulkin, a former top official at the Commodity Futures Trading Commission and now a partner at Steptoe & Johnson in Washington D.C.

Any change in direction could take time to play out. Most of the main financial regulators are independent of the White House, shielded from direct political influence by mechanisms such as staggered terms for governing members and limitations on when a leader can be replaced.

Regulatory Agency Agendas, Policies

As opposed to the legislative branch, however, some experts believe that any real movement will come from the new administration first, with Congress preoccupied with issues such as COVID-19 relief aid to struggling consumers and businesses and tackling the virus itself.

“I tend to think the financial sector is not going to be top of mind in terms of legislative changes,” said Margaret Tahyar, co-head of Davis Polk’s Financial Institutions Group. In her view, there are issues that banking regulators, such as the Federal Reserve, are likely to address as a matter of course given their prior announcements.

With the Fed’s vice chair for supervision, Randal Quarles, having already announced that the non-bank sector will be a top priority for the regulator -- as well as the international Financial Stability Board, which he also chairs -- one can expect that money market funds and other parts of the non-banking sector that witnessed extreme turbulence back in March will come under renewed scrutiny.

Quarles’s term as vice chair for supervision runs until October 2021, and many expect it is at that point that he would likely step down from the Fed.

Other areas where Biden may spend some political capital to make changes is strengthening consumer protections, for example by addressing predatory lending and data privacy.  Other proposals include establishing a postal banking system, strengthening Dodd-Frank requirements, and creating a public credit-rating agency within the Consumer Financial Protection Bureau (CFPB).

A Transition Role for Gensler

Biden is expected to tap Gensler to advise on a transition plan for financial industry oversight, the Wall Street Journal reported on Friday, citing people familiar with the matter. Gensler, who took a tough regulatory stance on Wall Street while heading the CFTC from 2009 to 2014, was expected to lead a team of policy experts focused on banking and markets regulators as part of a customary review process undertaken by an incoming administrations,

The CFPB will be an interesting early test for Biden given the past politicized nature of the agency, created under Dodd-Frank in the aftermath of the financial crisis. Whether current Director Kathleen Kraninger, confirmed to a five-year term in December, 2018,  would choose to stay in her post under a Biden administration is unclear, but experts expect that Biden would receive pressure from progressives to remove her if she does not step down willingly.

“A Biden administration could have trouble getting a more progressive CFPB appointee confirmed by a Republican Senate," said the consultancy PwC in a report. “Aside from more aggressive enforcement, a Biden administration’s consumer protection targets could include requirements around payday lending, student loans, algorithmic bias, and mandatory arbitration agreements.”

ESG issues will also be in the spotlight as Biden attempts to appeal to the more progressive part of the Democratic party. While a good deal of traction on these issues will come from the legislature, particularly if the Democrats take control of the Senate, regulatory agencies, in particular the Securities and Exchange Commission, will also have an influential role to play.

“You will see a tremendous focus on stakeholder capitalism and the SEC will be very much in the middle of that,” said Karen Petrou, the head of Federal Financial Analytics, a regulatory consulting firm.

“Personnel is Policy”

There has been much speculation about who Biden will appoint to key cabinet and regulatory positions. Regarding the latter, there are the five primary financial agencies to consider: Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the SEC and the Commodity Futures Trading Commission.

For the latter two, currently led by Jay Clayton (SEC) and Heath Tarbert (CFTC), respectively, the customary practice is that when there is political change at the White House, the two chairs typically stand down. An interim chair would be selected until the administration decides on whom to nominate for the top job. For the CFTC, there are two Democratic commissioners, Rostin Benham and Daniel Berkovitz, who experts say have roughly equal chances of being selected as interim chairman.

At the SEC, the senior Democratic commissioner, Allison Herron Lee, would likely become acting chair given her length of tenure.

Meanwhile, at the Federal Reserve, most agreed there would be little incentive to replace current chairman Jay Powell, particularly given the ongoing pandemic and economic challenges the country faces.

For FDIC chair Jelena McWilliams, many said they expect her to remain at her post given the favorable ratings she has received and her support for progressive policies, particularly in terms of poorer community lending. Her term expires in June 2023.

The Comptroller of the Currency, however, may see a change at the top. Brian Brooks, acting head, who took over from Joseph Otting when he stepped down earlier this year, is not seen in sync with a Biden administration’s agenda. As one legal expert put it: “There is no way he is going to be nominated by Biden.”

Petrou, of Federal Financial Analytics, said: “Brooks has been taking a number of positions that are not likely to be advanced under a Biden administration.”

While certain rules put in place under Brooks could be reversed, proposed charters, such as the “special payment charter” proposed by the OCC might be more difficult to dislodge should they take effect, Petrou said. The charter would allow payments companies, such as PayPal, and cryptocurrency exchanges, such as Coinbase, to operate across state lines under a single set of rules as well as expand the financial services they offer.

And Then There is the Treasury

Perhaps the most intense speculation has been around who would lead the U.S. Treasury. The Treasury Secretary leads the adminsitration's economic policy and presides over the interagency Financial Stability Oversight Council.   The two top candidates appear to be Senator Elizabeth Warren and Fed governor Lael Brainard. A Warren-led Treasury would be viewed as anathema on Wall Street given her long history of attacking banks for their reckless behavior. Whether Biden would wish to expend a lot of political capital on the Treasury post is something that some question.

“Given the pandemic and the economic slowdown I don’t think Biden would want to spend his political capital on a Treasury or SEC chairman,” said Kulkin of Steptoe & Johnson. “With a Republican controlled Senate the nominees probably become more moderate in order to get them confirmed quickly. If Democrats control the Senate I think there is probably a stronger push toward more progressive nominees and diverse individuals.”

If Biden’s more moderate and pragmatic instincts hold, Brainard is seen as the safer choice. The Fed governor is well respected on Wall Street and has been increasingly vocal on issues such as the Community Reinvestment Act, a federal law enacted in 1977 to encourage depository institutions to meet the credit needs of low- and moderate-income neighborhoods. Brainard has also been the lone dissenter in a number of recent Fed policy votes, leaning more towards the political left in her arguments, a sign some say suggests she would very much welcome the Treasury job.

Democratic control of the Senate seen critical

Financial regulatory issues will take time to come into sharper focus in a Biden administration. Should Republicans retain the Senate, it will be much more difficult to push through progressive policies through legislation as well as through regulatory agencies. It might also affect who the administration chooses for top positions.

Senate control will influence financial services regulatory agency appointments because senior positions in each of the agencies are subject to Senate confirmation with 51 votes. Biden could be even more limited in his choices if Republicans retain control.

Although several races in for the House of Representatives remained undecided as of Monday, the party appeared posed to retain control with a narrowed majority.

Political news service Axios reported on Thursday that Senate Majority Leader Mitch McConnell, if his party retains its control of the Senate, plans to prevent Biden from stocking his Cabinet with perceived liberals, and making for a more centrist leadership in areas including financial policy, through the Treasury Department.

“This scenario (a Republican-controlled Senate) would likely prevent any nominees with strongly progressive views on financial services, but even a thin Democratic majority may have difficulty with any untraditional choices,” PwC analysts said. “As a result, while there are only rumors of potential Biden appointees, we expect the majority of his choices to be moderate, consensus-focused agency leaders that would be unlikely to take an activist position with regard to financial services policy.”

However, if Democrats are in control, experts say a more activist agenda will emerge from Sherrod Brown, who would chair the Senate Banking Committee. Brown has been quite vocal on issues such lending to poorer communities and has also been critical of large banks.

For example, Brown recently called for criminally prosecuting executives who profit from moving money for criminals. “I think if some bankers go to jail, that stuff stops happening,” Brown said in an interview with the International Consortium of Investigative Journalists.

This article first appeared in Thomson Reuters Regulatory Intelligence on November 9, 2020.

Henry Engler is a Senior Editor, Regulatory Intelligence at Thomson Reuters.

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