July 1, 2024

By John Donnelly, Head of US Financial Services

*As we reach the year’s midpoint, Capstone is revisiting our sector 2024 predictions and looking ahead to the second half of 2024.

As Capstone predicted, the 2024 financial services landscape has been anything but boring as regulators race against the electoral clock to pursue Biden’s agenda before the election.

We’ve seen heightened action on real estate price-fixing and consumer-friendly regulatory pressure on financial companies providing consumer-facing products and services. We expect the drama to continue in the second half of the year following the Supreme Court’s ruling that the Consumer Financial Protection Bureau’s (CFPB) funding stream is constitutional. And, of course, the looming election will inject an additional layer of intrigue into the unfolding policy narrative for both companies and investors.

In a recent Q&A, John Donnelly, Capstone’s head of US Financial Services, shared what the remainder of 2024 holds for financial services policy.

Did you have any expectations going into 2024 that have already played out?

One area where things played out mostly as we expected was in the consumer finance industry. After oral arguments, we were confident the Supreme Court would reject the CFPB’s funding mechanism challenge, but that the legal overhang would delay the regulatory agenda through the first half of the year. That happened as the bureau took only three enforcement actions this year before the May 16^th opinion, and courts stayed the credit card late fee rule. Now, the CFPB is coming back strong, putting out guidance on buy now, pay later, and bank fraud liability and moving forward on rulemaking for housing closing costs, removing medical debt from consumer credit reports, and a “repeat offender” registry. We think this aggressive agenda will continue at least through the end of the year, although the next legal challenge has already emerged, arguing that the CFPB is funded by Fed “earnings” and any funding when the Fed operates at a loss, as it has recently, is invalid.

What was overlooked by the market in the first half of the year?

One issue we think is still fairly overlooked is the dynamics in the payment space. In the last year or two, we’ve seen a significant change in attitudes where card interchange fees have been grouped with “junk fees” that are being targeted by the Biden administration. On the federal level, that’s resulted in a proposal by the Fed to lower the debit interchange cap for financial institutions with over $10 billion in assets and a strong push for the Credit Card Competition Act, which would require a second routing option on Visa and Mastercard credit cards issued by large banks. The CFPB and DOT have also combined to scrutinize rewards programs, particularly focused on airline programs and the practice of “devaluing” points. Interestingly, though, the states have also picked up the issue. Illinois passed legislation prohibiting interchange fees on taxes and gratuities, and Pennsylvania is considering following suit. Historically, these bills have been proposed but the card issuers have been successful in arguing that lawmakers didn’t fully appreciate the complexity of implementing the plan and the burden for everyone in the ecosystem – issuers, card networks, acquirers, merchants, and payment processors. We view the recent success as further evidence that policy maker perspectives on interchange have shifted significantly.

What are the big questions you are paying attention to for the balance of 2024?

Given the impact it would have across the financial services industry, we’re closely watching the efforts on bank reform. We think the Fed will have a difficult time finalizing its Basel III endgame proposal by the end of the year as we’re still waiting on the quantitative impact study, which the Fed has said will be followed by a comment period. Recent reports have indicated the Fed has been discussing a watered down version by stakeholders – we think if they follow through on that by the end of the year then the banks may be less interested in a legal challenge and the regulations could go into effect, even if there is a turnover in administration.

What areas face a mounting policy environment going into the second half of the year?

A space that we think will be very interesting is the current dynamics on antitrust litigation. We saw the landmark National Association of Realtors (NAR) settlement earlier this year and now the DOJ has demonstrated interest in price fixing software programs in the multifamily housing and hotel industries, which we think could extend further as well. These models face challenges from class action litigation, state regulators, and the DOJ, so it’s also not something that would disappear if you have a new administration. Our team, especially Makenzy Mohrman and Spencer Van Every, have been following this issue really closely and actually created a tracker for key developments in this litigation. We expect that the tracker will have a lot of updates that will be added through the second half of the year.

How will the upcoming elections influence financial services policy?

Of course, the elections will have a huge impact on the financial services industry. If President Biden is reelected, we expect more of the same, and regulations that are currently proposed or finalized are much more likely to go into effect – or at least get an opportunity to be defended in court as many face legal challenges. These include the DOL’s Retirement Security Rule, the CFPB’s credit card late fee safe harbor, the FTC’s non-compete rule, the CFPB’s forthcoming fair credit reporting rule on data brokers, and Basel III endgame, as we discussed. We also expect the administration to designate certain non-banks as systemically important in 2025, and it seems they may be focused on the non-bank mortgage market. If former President Trump is elected, then I think everyone expects more deregulation and we believe the administration would vacate or delay most rules that haven’t gone into effect. We could see reconsideration of releasing the government sponsored enterprises (GSEs) from conservatorship and opportunities for bank M&A. At the same time, states and private litigation will continue scrutinizing antitrust, consumer finance, and payments issues if the federal government steps back.

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