Regulatory Note – Impact on the Banking Sector of the Executive Order on Competition
Last Friday, July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy (the “Order”). For banks considering or engaged in negotiations for merger and acquisitions, the Order presents an immediate question about the scope of bank merger application reviews early next year. The Order contains a few other noteworthy provisions for banks as well.
The Order adopts a “whole-of-government” approach to address the Administration’s concerns about overconcentration, monopolization, and unfair competition in a wide range of industries. It “encourages” – the Order does not mandate particular actions but certainly is likely to have that effect – many federal departments and agencies to consider various changes to programs that may have an effect on competition. In discussing competition, the Order goes beyond traditional antitrust principles and includes consumer protection, privacy, and data security. For the banking industry, the Order includes three provisions:
By early January 2022, the Justice Department and the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the “Agencies”) are “encouraged” to adopt a plan for the “revitalization” of merger oversight. In the words of the Fact Sheet that accompanies the Order, the plan will provide for “more robust scrutiny” of bank mergers.
The Consumer Financial Protection Bureau (“CFPB”) should complete its rulemaking on consumer access to financial records.
The CFPB is expected to enforce the prohibition on unfair, deceptive, or abusive acts or practices in a way that ensures the proper functioning of the competitive process.
The Order also creates a new White House Competition Council to monitor agency work on the initiatives, including those for the banking industry. A few preliminary thoughts:
Revitalization plan for bank mergers. The relatively short timeline in section 5(e) of the Order for a plan that “revitalizes” the review of bank mergers may pose a real challenge to insured depository institutions and their holding companies (collectively, “banks”) now considering or negotiating mergers. The Order directs the Attorney General, in consultation with the heads of the Agencies, to review current practices and to adopt a revitalization plan, not later than 180 days after date of the Order (that is, by January 5, 2022) for merger reviews under the Bank Merger Act and the Bank Holding Company Act. The plan is to be in accordance with the factors enumerated in those statutes.
The revitalization plan presumably will attempt to fulfill the purposes stated in the Order: ensuring that Americans have choices among financial institutions and guarding against excessive market power. The Fact Sheet provides a little more guidance on the Administration’s concerns. It notes the extent of consolidation in the banking market historically, states that no bank merger application has been formally denied in more than 15 years, and observes that consolidation in the banking industry has a disproportionately adverse effect on small businesses and minority and low-income communities.
However, the immediate issue raised by the revitalization plan is its time frame rather than its substance. The plan is due by early January – a time at which applications for mergers announced in the second half of 2021 may still be in the regulatory review process. The publication of the plan thus could mean midstream changes in the Agencies’ merger reviews. For several reasons, the Agencies may be expected to provide some assurance that pending applications would not be affected by the plan, but such an announcement remains to be seen. In any case, the prospect of near-term changes to the regulatory review process places a premium on careful consultations with the Agencies as potential transactions go forward.
The substance of the revitalization plan also warrants close attention by the banking industry. The plan is expected to provide for “more robust scrutiny” of bank mergers, but the scope of that term is not necessarily foreordained. The Order appears to limit the scope of the plan to the review factors already contained in the existing merger statutes, but some of these factors may be open to more than one interpretation.
Two other projects outlined in the Order may affect the development of the plan. For example, the Treasury Secretary is to submit a report pursuant to section 5(v) of the Order that assesses the effects on competition of large technology firms’ and other non-bank companies’ entry into consumer finance markets. Although this report is not due until 90 days after the deadline for the revitalization plan, the Treasury Department is virtually certain to consult the Agencies at the same time they are working on the revitalization plan. Section 5(c) of the Order also directs the Justice Department and the Federal Trade Commission to consider modifications to the Horizontal Merger Guidelines. Since these guidelines are the foundation for the bank merger guidelines, any modifications could affect the content of the revitalization plan.
Consumer access to financial information. Section 5(t)(i) of the Order encourages the CFPB to issue a rule allowing customers to download their banking data and take it with them. This policy is not new and dates back at least ten years. Section 1033 of the Dodd-Frank Act directs that – subject to rules prescribed by the CFPB – a consumer financial services provider make available to a consumer information in the control or possession of the provider concerning the consumer financial product or service that the consumer obtained from the provider.
The CFPB has been working on these rules since at least 2016. A review of the history of the rulemaking and the agency’s most recent regulatory agenda suggests that no final rule is likely before the end of 2022. The issuance of the Order may accelerate this process, however.
Enforcement. Since its inception, the CFPB has had enforcement authority under section 1031 of the Dodd-Frank Act to prevent unfair, deceptive, or abusive acts or practices in connection with consumer financial products and services. Section 5(t)(ii) of the Order contemplates that the CFPB now will enforce section 1031 in such a way that bad actors do not distort the proper functioning of the competitive process and do not obtain an unfair competitive advantage.
Neither the Order nor the Fact Sheet discuss the purpose of this directive or what successful implementation would look like. The CFPB could rely on the provision to craft a more aggressive strategy to enforce section 1031.
Oversight. A new White House Competition Council (the “Council”) will monitor the progress of all the departments and agencies in finalizing the initiatives in the Order. Members of the Council include several cabinet members, and the Director of the National Economic Council, currently Brian Deese, will chair the Council. The Director of the CFPB is likely to be a member of the Council – the Order requires the Chair to invite the Director to participate. The heads of the federal bank agencies are not named as members (although of course one participant, the Secretary of the Treasury, oversees the Office of the Comptroller of the Currency), but still might be invited to or otherwise have roles with the Council.