Banks, Financial institutions, corporates to face increased compliance costs in 2022

2022 is set to be a turning point for US financial policy as the Biden Administration’s regulators ready a slew of regulations that are likely to increase the cost of compliance for Wall Street and corporate America.

Biden’s top financial regulatory team is taking shape. Over the next 1 year, Biden’s regulators are set to reverse the Trump administration’s light touch, taking a tough stance on Wall Street and new players entering the financial sector.

Top items on the Biden administration’s ambitious agenda include creating a regulatory framework for digital assets and financial technology players, boosting competition and addressing climate change.

2022 promises to be a critical year for financial companies, said analysts and Washington insiders say.

“2022 is the year where the rhetoric turns into reality for some of the key financial services policy priorities,” said Isaac Boltansky, director of policy research for brokerage BTIG.

While progressives were aiming for a swift financial policy overhaul in 2021, the slow pace at which the White House has filled key posts at the Federal Reserve, the Treasury Department, consumer watchdog and commodity markets regulator, has delayed policy changes, said Aaron Klein from the Brookings Institution.

Many of these roles are scheduled to be filled in the coming months so that regulators can get down to business.

Cryptocurrencies will be a key area to watch, said executives.

Regulators have been exploring the risks of the digital assets and have weighed options on how they can be regulated under existing federal rules.

They have warned that stablecoins, digital currencies pegged to a traditional currency, could become systemically risky if they grow in popularity and should be regulated like banks.

“We’ll see the federal financial regulators, who have been very clear that this activity needs to be regulated across the board, start to move forward on some of the specifics,” said Zach Dexter, CEO of crypto trading platform FTX US Derivatives.

Regulators are also likely to scrutinize fintech players that are moving into the banking space with lending and payments products, midst growing concerns that lightly supervised players may be hurting consumers.

“You’ll continue to see a lot of activity there, and we’ll be very, very active in that debate,” said Rob Nichols, CEO of the American Bankers Association.

Case in point: Rohit Chopra, who became director of the Consumer Financial Protection Bureau in October, has demanded data from big tech companies and buy-now-pay-later fintechs on their businesses, suggesting both sectors will receive heightened scrutiny in 2022, said industry executives.

“Chopra is also likely to move ahead next year with a rule to create so-called open banking,” said Scott Talbott, a senior vice president at Washington trade group the Electronic Transactions Association.

This would require traditional financial institutions to give customers access to their own financial data, allowing them to switch more easily between providers, boosting competition.

Regulators are also expected to crack down on bank tie-ups after the Fed and Justice Department complete a review of merger policies next year. Both developments spell increased cost of compliance for banks.

“Although significant regulatory pressure has not yet been a decisive factor for the market, investor concern is rising for 2022 and beyond,” wrote Raymond James in his 2022 banks outlook.

Green Financing Norms

For Corporate America, the Securities and Exchange Commission’s draft rule requiring public companies to disclose climate change-related risks could be a game-changer, exposing them to increased public and investor scrutiny.

“Corporations are likely to push back on the proposal, which is expected during the first quarter, setting them up for a potentially bruising battle with SEC Chair Gary Gensler”, said Washington insiders sources on the condition of anonymity.

Banks are also likely to face new climate change lending rules from the Office of the Comptroller of the Currency, which earlier this month said it wanted banks to integrate climate risk into every aspect of their businesses.

“We expect a notable uptick in activity on climate risk analysis and integration into examination processes,” wrote Raymond James. “In all, we see a unified financial regulatory agenda emerging for 2022, with important consequences for banks and the broader financial sector.”

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