The U.S. Supreme Court in a decision issued Monday ruled the Consumer Financial Protection Bureau’s single-director structure violates the separation of powers between the executive and legislative branches and is unconstitutional while also ruling that the CFPB can continue to operate.

In a 5-4 decision in Seila Law v. Consumer Financial Protection Bureau, the Court ruled the CFPB’s leadership by a sole director “lacks a foundation in historical practice and clashes with constitutional structure by concentrating power in a unilateral actor insulated from presidential control,” Chief Justice John Roberts wrote in the majority opinion for the Court.

“While we need not, and do not, revisit our prior decisions allowing certain limitations on the President’s removal power, there are compelling reasons not to extend those precedents to the novel context of an independent agency led by a single Director,” Roberts wrote. “Such an agency lacks a foundation in historical practice and clashes with constitutional structure by con­centrating power in a unilateral actor insulated from Pres­idential control. We therefore hold that the structure of the CFPB violates the separation of powers.”

In a separate 7-2 majority, the Court went on to hold that “the CFPB Director’s removal protection is severable from the other statutory provisions bearing on the CFPB’s authority,” Roberts wrote. “The agency may therefore continue to operate, but its Director, in light of our decision, must be removable by the President at will.” Justices Clarence Thomas and Neil Gorsuch dissented from the severability ruling.

The Supreme Court’s decision is the result of a challenge filed by Seila Law, which had argued that, because the CFPB director is removable by the president “only for cause,” the agency’s structure is unconstitutional. The CFPB, established in 2010 by the Dodd-Frank Act, states the director serves a five-year term. Once confirmed, the director can be removed only by reason of “inefficiency, neglect of duty, or malfeasance in office.”

Seila Law, which is under investigation by the CFPB for violating telemarketing rules, argued the CFPB’s demand for information in connection with the investigation should be nullified. Both the district court and the appellate court rejected Seila Law’s argument. But in an interesting twist to the case, in a brief filed with the court in September 2019, the CFPB agreed with Seila Law that the agency’s structure is unconstitutional.

Dissenting argument

Justices Elena Kagan, Ruth Bader Ginsburg, Stephen Breyer, and Sonia Sotomayor agreed on the severability question but disagreed about the unconstitutionality of the single-director structure. In writing for the dissent, Kagan argued the for-cause standard in the statute creating the CFPB does not violate the Constitution.

“This Court, as the majority acknowledges, has sustained the constitutionality of the FTC and similar independent agencies. The for-cause protections for the heads of those agencies, the Court has found, do not impede the President’s ability to perform his own constitutional duties, and so do not breach the separation of powers,” Kagan wrote. “There is nothing different here.”

Kagan continued, “The CFPB wields the same kind of power as the FTC and similar agencies. And all their heads receive the same kind of removal protection. No less than those other entities—by now part of the fabric of government—the CFPB is thus a permissible exercise of Congress’s power under the Necessary and Proper Clause to structure administration.”

CFPB responds

“Today’s Supreme Court decision finally brings certainty to the operations of the Bureau,” CFPB Director Kathy Kraninger wrote in a tweet. “We will continue with our important mission of protecting consumers with no question that we are fully accountable to the President.”

Joann Needleman, leader of the Consumer Financial Services Regulatory & Compliance practice group at Clark Hill, says the decision is “an important win to ensure consistency within the financial services industry,” adding that the CFPB’s oversight and authority “has been questionable since its inception.”

Richard Perr, chair of the Consumer Financial Services practice at Kaufman Dolowich & Voluck, calls the decision a “precedent-setting constitutional opinion.” That the Supreme Court refused to strike down the entire Bureau “immediately leaves the Director susceptible to removal by the President at will,” he says.

The decision could have regulatory ramifications as well. “The ruling should push the CFPB into releasing and publishing several of its proposed rules that are in the pipeline, given that the current director can no longer anticipate staying in her five-year term if the Democratic nominee for president wins the November election,” Perr says.

“The decision by the Supreme Court today places the CFPB at a crossroads for its path forward,” says Michael Cavallaro, a partner with law firm Barnes & Thornburg. “If the CFPB remains a single director structure, fireable at will by the president, the director may be required to limit enforcement actions and new rulemaking to areas with considerable bipartisan support in order to survive multiple administrations.”

“There seems to be some support from the industry and members of the court for Congress to create a five-member commission to lead the Bureau, which would may provide more stability,” Cavallaro adds. “As we sit near another potential economic downturn, it will be very interesting to see what, if any, action Congress decides to take related to the structure of leadership and potential retooling of the Bureau’s charge.”