The Senate's razor slim vote to repeal the Consumer Financial Protection Bureau's arbitration rule was arguably the industry's biggest policymaking victory since passage of the Dodd-Frank Act. But does it mean the regulatory tide has turned in banks' favor? Many are skeptical.
"It's a very big win for banks, and a huge victory that [the Senate] finally did it, but I don't think the implications of it are all that broad," said Alan Kaplinsky, the co-practice leader at Ballard Spahr's consumer financial services group. "This was an unusual situation where there was almost universal support for an override, and look how difficult it was; they eked by."
The 51-to-50 vote, which required Vice President Mike Pence to break a tie, overturned a rule abhorred by banks that would have have prohibited arbitration clauses that preclude consumers from bringing class actions. The repeal was authorized by the Congressional Review Act, which allows lawmakers to reverse agency rules with a simple majority.
Despite the close margin, the measure was an unambiguous win for banks. It not only invalidated the CFPB regulation, but the bureau cannot bring back the regulation in the future without congressional approval, which requires 60 votes in the Senate.
To be sure, banks have notched policy successes since Dodd-Frank. For example, as part of a 2014 spending bill, lawmakers repealed a Dodd-Frank provision requiring banking firms to push out a portion of their swaps business into subsidiaries. Yet that measure was seen as benefiting large banks, particularly Citigroup, whereas the arbitration rule repeal has wider appeal.
Some experts think the momentum will continue as Republicans support rolling back post-crisis regulations. Repealing the arbitration rule could embolden regulated entities to challenge the CFPB more than in the past.
"This could set off a chain of events that means more overall victories," said Jenny Lee, a partner at Dorsey & Whitney and a former CFPB enforcement attorney.
But she cautioned that repealing the arbitration rule may also be a special case since the rule had elicited such universal objections from financial institutions.
"The arbitration rule had a larger and more systemic opposition than any other CFPB rule," Lee said.
What the arbitration rule repeal also had in its favor was clear support from members of the Trump administration. Many said securing enough Senate votes to pass the Congressional Review Act measure was helped by last-ditch efforts from acting Comptroller of the Currency Keith Noreika, who urged senators to vote against the rule, and the Treasury Department, which issued a scathing report criticizing the CFPB rule a day before the vote.
Yet observers said any momentum from Tuesday's vote will not be enough, for example, to spur a bipartisan deal on regulatory relief. For one thing, such a reform package still needs 60 votes.
Getting legislation that requires the support of Democrats "is another kettle of fish," Kaplinsky said.
Repealing the arbitration rule may also not have much effect on other industry priorities simply because the intense policy and political environment in Washington is focusing efforts in other areas besides financial services.
"Larger-scale legislative reform will be more difficult because of the ability of a bloc of 40 senators to block" legislation, said Ted Frank, a senior attorney and director of the Center for Class Action Fairness at the Competitive Enterprise Institute.
Yet he added that the arbitration vote proved that congressional leaders are working aggressively to try to eke out any victories they can.
"I don't believe this administration has the attention span or focus or constancy to pass any major legislative initiative, but [House Speaker Paul] Ryan and [Senate Majority Leader Mitch] McConnell may be able to work wonders notwithstanding regularly being undermined by the president and being put in a bad spot by the last debt limit deal," said Frank.
While the industry's vocal support for repealing the arbitration rule helped the measure get to the finish line, banks may also have benefited from the fact that consumers possibly are not that familiar with the technical aspects of the CFPB regulation, softening any consumer backlash.
But the financial services industry might have a tougher time reversing other rules that consumers may more clearly understand, such as the CFPB's recent policy cracking down on payday and other short-term lenders.
"Arbitration was the tipping point, the last straw that broke the camel's back, it was too much for the industry to bear," said Craig Nazzaro, of counsel at Nelson Mullins Riley & Scarborough. "When it comes to rules governing Main Street, like a payday loan, those are understood by the general population, while more involved regulations will be a little easier to unwind, or gain back ground."
Still, Nazzaro added, the arbitration win could usher in an environment "where you're going to see a potential rollback of regulations that the American public doesn't understand, like the Volcker Rule, or capital requirements."
Jaret Seiberg, a financial services and housing policy analyst at Cowen Washington Research Group, cautioned against overreacting.
"This is not going to unleash the floodgates of deregulatory legislation for financials from Congress," Seiberg wrote in a research note Wednesday. "This was a limited question on whether consumers were better off with mandatory arbitration or class action litigation. Voters are still populist and still do not like big financial institutions. Those same voters, however, also don't like class-action lawyers."
Others said further reform will be tough to accomplish as long as there are still Obama administration holdovers in key positions at the prudential regulators.
"The appointment of policymakers is the most important task," said Joe Lynyak, a partner at Dorsey & Whitney. "While not a panacea and not a quick fix, starting the regulatory milestones requires the appointment of new senior agency personnel. There is a difference between having neutral parties at the agencies versus people who will affirmatively implement ... reform."
