Fairness and Inclusion: 2023 Regulatory Challenges

Expanded "fairness"

Regulators have expanded their expectations of “fairness” to reach beyond fair lending laws and credit products to incorporate all consumer/investor products and services over the entire product life cycle. “Unfair” outcomes need not be intentional to result in consumer/investor harms and regulators will be focusing on companies’ efforts to ensure a “fair and balanced” approach for all customers. 

Heightened regulatory attention will be directed toward: 

• New or changing regulatory expectations such as
  • SEC’s Regulation Best Interest, including conflicts of interest, disclosures, account selection (a supervisory and examination focus in 2022 and beyond). 
  • SEC’s Investment Adviser Marketing Rule, covering both direct and indirect communications, in multiple formats (e.g., text, video, podcast), and presenting “clear and prominent” as well as “fair and balanced” information (compliance required beginning November 2022). 
  • Anticipated new rules to measure outreach, access, and impact such as CRA qualifying activities, small business lending, and BNPL credits. 
  • Potential new rules aimed at improving “inefficiencies” in the national market system that may disproportionately impact retail investors (such as best execution, order-by-order competition, and minimum pricing increments). 
  • Reviews of potential anti-competitive effects from M&A activity 
• Expanded supervisory expectations and/or applications related to: 
  • Fair lending, considering fair access, model bias, redlining. 
  • Protections provided by the UDAAP prohibitions to scrutinize discriminatory practices across products and services (e.g., auto loans, servicing, payments, deposits, advertising, sales practices) in situations not specifically covered by fair lending laws. 
  • Complaints management, focusing on the timeliness, substance, and completeness of responses as well as the consistency between consumer groups. 
  • Fees policies and practices, including overdraft, credit card, “convenience,” and exchange fees and rebates. 
  • The diversity of vulnerable populations, which may vary by culture, geography, stage of life, and financial status. 
  • Efforts to address access and inclusion through practices, models, channels, and digitalization (to overcome disadvantages such as rural locations, limited internet, financial capability, low levels of literacy or numeracy, language barriers).  

Impact and justice

The Administration is directing regulatory and enforcement agencies to take action on multiple fronts to promote racial, social, and economic equity; protect consumers and investors from products and practices that may cause financial harm; and prioritize vulnerable groups and communities experiencing disproportionate impacts. In financial services, these efforts will be seen in 2023 in areas such as:

• Testing and monitoring of models, algorithms, and decision-making processes used in connection with consumer/investor financial products and services (e.g., marketing, sales, underwriting) for potential disparate treatment, access limitations, or discriminatory outcomes.
• Analysis and documentation of consumer demographics and the impact of various products, fees, revenue sources, costs, and actions (such as account freezes) on different demographic groups.
• Consideration of bank mergers. Updates to the bank merger guidelines will focus on fair competition (evaluating potential for excessive concentration, barriers to entry, abuses of market power, and effects of monopoly and monopsony); impacts on the availability of financial products and services in relevant communities or geographies (potentially including consideration of non-bank market participants such as credit unions and fintechs); and the risk of increased complexity within the financial system. 
• Environmental justice, including investigations and accountability, pursuant to a new DOJ/multi-agency strategy focused on impacts in “overburdened and underserved communities”.
• New grant and funding programs provided for in the Inflation Reduction Act (e.g., environmental justice, distressed farm loans), Infrastructure Investment and Jobs Act (e.g., broadband access, community connectivity), and the American Rescue Act (e.g., housing insecurity, small business).  
• Expanded qualifying CRA activities (as proposed), regardless of location, that emphasize support for minority, women, and low-income consumers; small businesses; small dollar loans and investments in LMI communities; community needs in “Native Land Areas,” as defined; and assistance in preparing for, adapting to, and withstanding disasters (natural and weather-related) or climate-related risks. 

Human capital and DEI

Diversity Equity and Inclusion is an ESG-related focal point for the Administration, policy makers, investors, and the public-at-large, driving regulatory focus on companies’ DEI goals, performance, and program maturation. This area, however, is subject to increasing reputation, legal, and compliance risks in light of additional voluntary as well as mandatory data reporting and via recent legal cases. Regulatory attentions are likely to include:

• Reporting requirements, such as:
  • Amendments to the SEC’s Human Capital Management Disclosure rule enhancing public company disclosures related to workforce diversity, turnover, training, health & safety, and compensation. 
  • Enhancements to SEC registrant disclosures about the diversity of board members and nominees.
  • Consistency between financial and nonfinancial, voluntary and required human capital and DEI disclosures. 
• Companies’ ability to demonstrate (consistent with aspects of the Joint Standards for Assessing Diversity Policies and Practices issued by six agencies – SEC, FRB, OCC, FDIC, NCUA, CFPB): 
  • Organizational commitment, evidenced through recruitment, retention, compensation, hiring, and promotion.
  • Outreach to workforce, communities, vendors and other third parties. 
  • Transparency through public statements and voluntary reporting of DEI commitments, goals, plans, and efforts.
  • Performance metrics and evaluation/assessments, including accountability measures, documenting progress toward stated commitments, goals, and efforts and related impacts.
• Forthcoming recommendations from Treasury’s newly created Advisory Committee on Racial Equity, which aims to “advance racial equity in the economy and address acute disparities for communities of color” with regard to financial inclusion, access to capital, housing stability, federal supplier diversity, and economic development.