SCOTUS moves could impact financial services regulation – what should banks do now?

Recent Supreme Court decisions look to have an impact on financial services.

And while the exact timing to retrain or shore up staff inside the bank or through partnerships is often unclear in the earliest days after a SCOTUS decision, bank and credit union compliance departments should prepare for new handling of Consumer Financial Protection Bureau (CFPB) rulings and more.

SCOTUS ruled late last week to limit the power of Washington regulators in interpreting “gray areas,” in the statutes for instance, when applying portions of outdated or ambiguous language in the law. And on Monday on a separate but related matter, the high court ruled to determine when the clock on the statute of limitations to challenge agency action begins to run.

In a nutshell, regulatory challenges within financial services could increasingly become legal challenges and that means when a regulator comes into a bank or credit union with a consent order, what happens next may be up to negotiation, or up to a court’s interpretation.

The first SCOTUS ruling important to financial services was specific to the 40-year-old Chevron deference, as it is colloquially known, and it primarily targeted environmental factors as might be obvious, but the reversal has implications for all federal regulatory agencies.

What did the Chevron and Swipe Fees rulings change?

The 6-3 Chevron ruling by the high court’s conservative majority, written by Chief Justice John Roberts, held that the Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority.

Courts have the option to defer to an agency’s interpretation of an ambiguous law, but SCOTUS ruled this option will be blocked going forward. Justice Clarence Thomas had argued more broadly in favor of reversing Chevron, saying the original execution of the framework allowed federal agencies to overextend their authority.

Trade groups that represent banking interests, as well as the pro-business Chamber of Commerce, welcomed the change as fostering a less cumbersome bureaucracy for financial services practitioners. “This is an important win for accountability and predictability at a time when agencies are unleashing a tsunami of regulation — in many cases clearly exceeding their statutory authority while making it harder for banks to serve their customers. We will continue to fight to ensure that bank regulators follow the law every time they exercise their powers,” the American Bankers Association said in a statement.

Others might argue that rules interpretation making its way through courts rather than a federal agency may cause decisions to drag out, increasing legal costs for both institutions and federal agencies alike.

“In some ways, [the Chevron deference] seemed to be a successful framework because the regulatory agencies, who specialize in enforcement of the law, could use their experience to interpret the law where it’s not exactly clear,” said Chris Boersma, product manager, in compliance, at BAI.

“Some have argued over time, especially in recent years, federal regulators have used this power to go after organizations, moves interpreted at times to be politically based, leveraging agency action to make big headlines and to potentially advance an agenda,” Boersma said. “There have been arguments in our industry suggesting that authority given to the CFPB by Congress has been unduly crossed over on multiple occurrences.”

On the other hand, “some industry watchers have said there are good examples of an agency showing it can be nimbler, and more expert-driven, than lawmakers and slow-to-respond legislation.”

One example has pointed to the CFPB allowing the same rules for the amount and frequency of interactions between a debt-collecting financial services institution and its customer apply to the increasingly popular format of texting as it does to phone calls, even though the law just didn’t mention text messaging at the time it was written.

Meanwhile, in Monday’s ruling for Corner Post v. Federal Reserve, which involved a convenience store’s debit-card transaction swipe fees, SCOTUS found by another 6-3 decision, “that essentially administrative agencies can be sued long after final agency rules take effect,” said attorneys Michelle Kallen and Anand Viswanathan, writing in a summary of the decision, for Jenner & Block. The ruling said it was not too late to find in favor of the retailers who argued the Federal Reserve’s Regulation II violates debit card swipe fee regulations.

In her dissent, Justice Ketanji Brown Jackson, wrote in part: “After today, even the most well-settled agency regulations can be placed on the chopping block.”

Retailers and financial services interests have been arguing over fees in this case and others. Swipe fees, also known as “interchange fees,” reimburse banks for the costs associated with offering debit cards. These fees are determined by card networks but capped by the Federal Reserve at 21 cents per transaction. The Fed has proposed lowering that cap even further to 14 cents, a move that smaller banks say makes it harder for them to pay for anti-fraud protections.

More of the same?

Already, in a couple of high-profile instances, the future of financial services rules has been tested in court challenges instead of within agency governance, which the Chevron and Swipe Fees rulings may simply accelerate.

The CFPB has seen at least two of its efforts at rulemaking already hit an appeals court roadblock when the U.S. Court of Appeals for the Fifth Circuit prevented CFPB from imposing credit card late fee limits and in expanding its interpretation of anti- discrimination laws.

Kate Judge, a professor at Columbia Law School, wrote in a post on X, formerly Twitter, that banking trade groups such as the American Bankers Association may generally embrace the Chevron case’s fall as ushering in greater deregulation, but in her view, it invites uncertainty that should not sit easily with the banking industry.

“The Chevron doctrine was central in facilitating deregulation,” she posted in part. “The result [Friday] does not mean less regulation; it just ensures more uncertainty about the obligations the law imposes on regulated entities.”

For one thing, consumer advocacy groups could step up legal action to challenge an era of lighter regulations, which could pose its own period of planning and cost uncertainty for banks and credit unions.

What can banks and credit unions do right now?

“Only time will tell how deep of an impact this decision will make on the regulatory agencies’ powers,” said BAI’s Boersma. “One thing we can expect is that there will be more and more push back, meaning lawsuits, toward regulatory agency decisions, slowing everything down when it comes to enforcement actions.”

Rachel Koning Beals is Senior Editor at BAI.