On his last day in the job, the head of a powerful U.S. bank regulator finalized a lightning rod rule that drew sharp criticism from the industry and members of the sustainability community who say it will harm efforts to combat climate change. Legal experts say the future of the rule remains in doubt as President-elect Joe Biden pledges to make climate a key focus and Democrats take control of the Senate.

The Office of the Comptroller of the Currency finalized its Fair Access to Financial Services rule on Jan. 14, the same day Acting Comptroller Brian Brooks stepped down. The polarizing rule takes effect April 1 and would require banks with more than $100 billion in assets to serve all legal industries, putting an end to bank boycotts of certain sectors.

The rule takes the anti-discrimination language that is normally used to help protected classes of individuals and applies it to protect politically sensitive industries, such as Arctic drilling, private prisons, gun manufacturers and coal. In announcing the final rule, Brooks said that "elected officials should determine what is legal and illegal in our country."

'Hastily conceived and poorly constructed'

Banks came out in opposition to the rule. Prominent industry trade group, the American Bankers Association, said it is "a mistake" for the regulator to mandate which businesses banks must serve.

"Banks are in the best position to manage their risks and maintain their safety and soundness. Given those procedural and substantive concerns, we urge that this rule not take effect," ABA Senior Vice President Hugh Carney said in a statement.

The Bank Policy Institute, or BPI, which represents large U.S. banks, issued an even stronger reproach. BPI President and CEO Greg Baer called the rule "hastily conceived and poorly constructed" and said it will "undermine the safety and soundness of the banks to which it applies."

The sustainability community also decried the rule. Steven Rothstein, a managing director at sustainability nonprofit Ceres, called the rule "absurd" and said it "flew in the face of healthy financial markets by attacking efforts to protect our economy from systemic financial risk." Ceres expects the rule to be dismantled "immediately" under the Biden administration.

If the rule remains in place, it will only create "a lot of busywork" for bankers, said Elizabeth Levy, portfolio manager and research analyst at sustainable investment firm Trillium Asset Management.

"Financing these fossil fuel projects, particularly in the Arctic, is just not economic. The business risk, the economic risk of funding them, would not prove attractive," Levy said in an interview. "So if they were forced to consider each individual request on its merits, I don't think they would come to a different decision. The government can't force them to loan money to projects that are uneconomic."

'A surprisingly quick turnaround'

The comment period for the rule was short at just 30 days; comment periods for complex rulemaking can often be 60 or 180 days. During that time, the regulator received thousands of comments — the Federal Register website listed 6,752 public comments as of Jan. 14, and the OCC said it considered more than 35,000 stakeholder comments and suggestions in finalizing the rule. But less than two weeks elapsed between the comment deadline and announcement of the final rule.

Lawyers from Troutman Pepper called this "a surprisingly quick turnaround for a federal rule, particularly given the large volume of comments and the opposition to the rule by the banking industry."

OCC spokesman Bryan Hubbard said the text of the regulation is less than three pages long and "not complicated." The "vast majority of comments were form letters that allowed pretty efficient review,” Hubbard wrote in an email to S&P Global Market Intelligence.

"Unlike other rules, this rule inspired many comments from average citizens supporting the rule as opposed to just having comments from professional advocates like trade associations and community groups," Hubbard said.

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The Fair Access rule generated many headlines because of the impact it would have on oil and gas companies and arms manufacturers, but Hubbard tweeted that "the debate over fair access is nearly a decade old and has involved more classes of industries and customers." Hubbard, in his email, listed foreign correspondent banks, ATM operators, foreign charities, pawnshops, embassies and agriculture as other industries that stand to be impacted by the rule.

Lawmakers on both sides of the aisle said politics were at play. On the right, Republicans have said banks are bowing to political pressure from activists in creating lending policies that put blanket bans on industries. The outgoing chairman of the Senate Committee on Banking, Mike Crapo, R-Idaho, applauded the OCC, saying in a statement that "business lending decisions should be based on creditworthiness, rather than politics or political pressure."

But N.Y. Rep. Carolyn Maloney, a Democrat and senior member of the House Financial Services Committee, said the rule is "misguided and blatantly political."

"It is not the role of the OCC to force financial institutions to lend to industries that present real risks and dangers to our society, particularly gun manufacturers," she wrote in a letter to Biden the day before the inauguration.

Maloney urged the president-elect to block the regulation "immediately" by instructing all agencies to withdraw any rules that have not yet been formally published, or by instructing the OCC to postpone the effective date of the rule. "This would also give you an opportunity to rescind the rule before it takes effect," she wrote Jan. 19.

Underscoring a deeper ESG divide

The OCC's Fair Access rule reveals a deeper debate surrounding sustainability policies: What role should environmental, social and governance factors play in financial decision-making? Broadly speaking, there are two camps: In one, the sustainability community argues that ESG risks are material and inseparable from other types of financial risks. In the other camp, ESG skeptics argue that things like climate risk are nonfinancial or nonmaterial and should be treated separately.

The debate came to a head during the Trump administration, with various rulemakings that pushed back against ESG principles. In October 2020, the U.S. Department of Labor finalized a controversial rule that appeared to back the latter camp, stating that fiduciaries cannot pick investment funds based on nontraditional influences such as ESG, other than in "rare" circumstances in which the product is deemed indistinguishable from traditional products.

Similarly, in proposing the Fair Access rule, the OCC was responding to Republican claims that banks were changing their lending policies based on political pressure from climate activists. The OCC investigated these claims and said it found that some banks changed their policies based on criteria unrelated to safe and sound banking practices. "Neither the OCC nor banks are well-equipped to balance risks unrelated to financial exposures and the operations required to deliver financial services," stated the OCC's proposal.

The rule encourages customers who believe they have been denied fair access to financial services to contact the OCC. It will allow the OCC to use its full range of potential enforcement actions including warnings, enforcement orders, penalties and referring matters to other agencies such as the Department of Justice's Antitrust Division.

Uncertain outlook

The banking industry has various mechanisms for pushing back on the OCC proposal — through Congress, by filing lawsuits under the Administrative Procedures Act, or by waiting to see what approach the new administration will take. Biden has been vocal in prioritizing climate change and his $1.9 trillion economic relief package includes many provisions that appear aligned with ESG principles. Biden also said he will freeze so-called "midnight regulation" action that the Trump administration took in its final days.

For now, the outlook appears uncertain.

"With President-elect Biden expected to appoint a new acting comptroller upon his inauguration on Jan. 20, it is unclear whether the new administration will seek to delay the effective date of the rule, or seek to repeal it altogether," lawyers from Troutman Pepper wrote. "Regardless, banks subject to the final rule should be prepared to adjust their risk assessment and decision-making processes to ensure compliance with the new rule."