Tag: fintech

Lawsuit Challenges CFPB’s ‘Buy Now, Pay Later’ Rule

On Oct. 18, 2024, fintech trade group Financial Technology Association (FTA) filed a lawsuit challenging the Consumer Financial Protection Bureau’s (CFPB) final interpretative rule on “Buy Now, Pay Later” (BNPL) products. Released in May 2024, the CFPB’s interpretative rule classifies BNPL products as “credit cards” and their providers as “card issuers” and “creditors” for purposes of the Truth in Lending Act (TILA) and Regulation Z.

The FTA filed its lawsuit challenging the CFPB’s interpretative rule in the U.S. District Court for the District of Columbia. The FTA alleges that the CFPB violated the Administrative Procedure Act’s (APA) notice-and-comment requirements by imposing new obligations on BNPL providers under the label of an “interpretive rule.” The FTA also alleges that the CFPB violated the APA’s requirement that agencies act within their statutory authority by ignoring TILA’s effective-date requirement for new disclosure requirements and imposing obligations beyond those permitted by TILA. The FTA also contends that the CFPB’s interpretive rule is arbitrary and capricious because it is “a poor fit for BNPL products,” grants “insufficient time for BNPL providers to come into compliance with the new obligations” imposed by the rule, and neglects “the serious reliance interests that [the CFPB’s] prior policy on BNPL products engendered.”

In a press release announcing its lawsuit, the FTA said the BNPL industry would welcome regulations that fit the unique characteristics of BNPL products, but that the CFPB’s interpretive rule is a poor fit that risks creating confusion for consumers. “Unfortunately, the CFPB’s rushed interpretive rule falls short on multiple counts, oversteps legal bounds, and risks creating confusion for consumers,” FTA President and CEO Penny Lee said. “The CFPB is seeking to fundamentally change the regulatory treatment of pay-in-four BNPL products without adhering to required rulemaking procedures, in excess of its statutory authority, and in an unreasonable manner.”

The FTA’s pending lawsuit notwithstanding, BNPL providers may wish to consult with legal counsel regarding compliance with the CFPB’s interpretive rule. Retailers marketing BNPL products should also consider working with legal counsel to implement third-party vendor oversight policies to enhance BNPL-partner compliance with the rule.

©2024 Greenberg Traurig, LLP. All rights reserved.
For more on the CFPB, visit the NLR Financial Institutions Banking section.

Tom Brady, Larry David, and Others Named Defendants in Class Action Suit Filed Against FTX

Four days after FTX, once the world’s third-largest crypto exchange, filed for voluntary Chapter 11 bankruptcy, former FTX investors filed a class action against 11 athletes and celebrities who promoted FTX in advertisements and on social media, including NFL quarterback Tom Brady and comedian Larry David.

The lawsuit, which also names FTX’s co-founder and former chief executive Sam Bankman-Fried as a defendant, seeks $11 billion in damage.

Background

The FTX bankruptcy filing covers about 130 FTX Group companies, including FTX.com, FTX’s US operations, and Bankman-Fried’s cryptocurrency trading firm, Alameda Research. According to published reports, Bankman-Fried had covertly used funds from FTX customers to make risky bets for Alameda Research – a hedge fund he also ran – and had commingled funds between the two entities.

Allegations Against FTX Celebrity Endorsers

The class action was brought on behalf of US investors who hold FTX yield-bearing accounts funded with crypto assets. The plaintiff and class-action members alleged that FTX lured them to its yield-bearing accounts and transferred investor funds to related entities to maintain the appearance of liquidity.

While an investor class action following bankruptcy is not necessarily surprising, the fact that the complaint named various celebrity endorsers and spokespeople as defendants is fairly unusual. Among them, Larry David starred in an advertisement for FTX that aired during the 2022 Super Bowl. The ad featured David being a skeptic on inventions such as the wheel, the fork, the toilet, democracy, the light bulb, the dishwasher, the Sony Walkman, and, finally, FTX, and cautioned viewers, “Don’t be like Larry.” Other conduct cited by the complaint includes:

  • Tom Brady and Gisele Bundchen: according to the complaint, Brady and Bundchen served as brand ambassadors for FTX, took equity stakes in FTX Trading Ltd., and appeared in an advertisement showing them telling acquaintances to join the FTX platform.

  • Kevin O’Leary: served as brand ambassador and FTX shareholder and made several public statements, including on Twitter, “designed to induce consumers to invest in” FTX’s yield-bearing accounts.

  • Naomi Osaka: the tennis star served as a brand ambassador for FTX in exchange for an equity stake and payments in an unspecified amount of cryptocurrency, appeared in advertisements, and promoted FTX to her Twitter followers.

The plaintiff and class members claimed that those FTX promoters engaged in a conspiracy to defraud investors and violated Florida state laws prohibiting unfair business practices. Specifically, in their civil conspiracy claim, the plaintiff and class members alleged that “the FTX Entities and Defendants made numerous misrepresentations and omissions to Plaintiff and Class Members about the Deceptive FTX Platform in order to induce confidence and to drive consumers to invest in what was ultimately a Ponzi scheme, misleading customers and prospective customers with the false impression that any cryptocurrency assets held on the deceptive FTX Platform were safe and were not being invested in unregistered securities.” [1]

Celebrities Under Scrutiny in Crypto Industry

The US Securities and Exchange Commission (SEC) has gone after celebrities for deceptively touting cryptocurrencies since 2017. In November 2017, SEC Chair Gary Gensler warned celebrities that federal securities laws require people who tout a certain stock or crypto security to disclose the amount, the source, and the nature of those payments they received.[2]

In October 2022, the SEC found that Kim Kardashian violated the anti-touting provision of the federal securities laws by plugging on social media a crypto asset security offered and sold by EthereumMax (EMAX) without disclosing the payment she received for the promotion.[3] Kardashian later settled with the SEC, paid $1.26 million in penalties, disgorgement, and interest, and cooperated with the Commission’s ongoing investigation.[4] “Ms. Kardashian’s case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities,” Gensler added.[5]

Investors have also gone after celebrities for deceptively touting cryptocurrencies. In January 2022, a group of investors filed a lawsuit against Kim Kardashian, along with boxer Mayweather and former basketball star Paul Pierce, for losses they suffered after the celebrities promoted EMAX.

Implications

This case offers a stark warning to celebrities and non-crypto companies that might be considering serving as brand ambassadors or paid influencers for crypto companies, or engaging in sponsorships. Any individual or organization considering entering into a co-promotion or sponsorship agreement with a company in the crypto industry should ensure adequate due diligence has been conducted on the potential partner and carefully scrutinize crypto and NFT offerings for potential liability or exposure under US securities laws. Notably, the US Federal Trade Commission is also carefully scrutinizing the use of influencers and endorsements in commercial marketing and imposes its own disclosure obligations.

© 2022 ArentFox Schiff LLP

For more Finance Legal News, click here to visit the National Law Review.

FOOTNOTES

[1] See Complaint, Count Three.

[2] See SEC Statement Urging Caution Around Celebrity Backed ICOs, available at SEC.gov | SEC Statement Urging Caution Around Celebrity Backed ICOs.

[3] See SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security, available at SEC.gov | SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security.

[4] Id.

[5] Id.

Dead Canary in the LBRY

In a case watched by companies that offered and sold digital assets1 Federal District Court Judge Paul Barbadoro recently granted summary judgment for the Securities and Exchange Commission (“SEC”) against LBRY, Inc.2 This case is seen by some as a canary in the coalmine in that the decision supports the SEC’s view espoused by SEC Chairman Gary Gensler that nearly all digital assets are securities that were offered and sold in violation of the securities laws.3 For FinTech companies hoping to avoid SEC enforcement actions, the LBRY decision strongly suggests that all companies offering digital assets could be viewed by courts as satisfying the Howey test for investment contract securities.4

LBRY is a company that promised to use blockchain technology to allow users to share videos and images without the need for third-party intermediaries like YouTube or Facebook. LBRY offered and sold LBRY Credits, called LBC tokens, that would compensate participants of their blockchain network and would be spent by LBRY users on things like publishing content, tipping content creators, and purchasing paywall content. At launch, LBRY had pre-mined 400 million LBC for itself, and approximately 600 million LBC would be available in the future to compensate miners. LBRY spent about half of the 400 million LBC tokens on various endeavors, such as direct sales and using the tokens to incentivize software developers and software testers.

Judge Barbadoro concluded as a matter of law (i.e., that no reasonable jury could conclude otherwise) that the LBC tokens were securities under Section 5 of the Securities Act. Applying the Howey test, Judge Barbadoro noted the only prong of the Howey test that was disputed in the case was: Did investors buy LBC tokens “with an expectation of profits to be derived solely from the efforts of the promoter or a third party”? Judge Barbadoro answered resoundingly, “Yes.”

Most important to his conclusion that investors purchased LBC tokens with the expectations of profits solely through the efforts of the promoter (i.e., LBRY) were: the many statements made by LBRY employees and community representatives about the price of LBC and trading volume of LBC; and many statements that LBRY made about the development of its content platform, including how the platform would yield long-term value to LBC holders. Critically, however, Judge Barbadoro found that even if LBRY had made none of these statements, the LBC token would still constitute a security because “any reasonable investor who was familiar with the company’s business model would have understood the connection” between LBC value growth and LBRY’s efforts to grow the use of its network. Even if LBRY had never said a word about the LBC token, Judge Barbadoro found that the LBC token would constitute a security because LBRY retained hundreds of millions of LBC tokens for themselves, thus signaling to investors that it was committed to working to improve the value of the token.

Judge Barbadoro flatly rejected LBRY’s defense that the LBC token cannot be a security because the token has utility.5 The judge noted, “Nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract.” Likewise, Judge Barbadoro was unmoved by LBRY’s argument that it had no “fair notice” that the SEC would treat digital assets as unregistered securities simply because this was the first time the SEC had brought an enforcement action against an issuer of digital currency.6

In sum, if Judge Barbadoro’s reasoning is applied more broadly to the thousands of digital assets that have emerged over the last several years—including companies that tout the so called “utility” of their tokens—they will all likely be deemed digital asset securities that were offered and sold without a registration or an exemption from registration.

The LBRY decision is yet another case in which a court has concluded a digital asset is a security. Developers of digital assets must proceed with a high degree of caution. The SEC continues to display a high degree of willingness to initiate investigations and enforcement actions against issuers of digital assets that are viewed as securities under the Howey and Reeves tests, investment companies, or security-based swaps.

For more Securities Law and Digital Assets news, click here to visit the National Law Review.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

FOOTNOTES

1 The SEC defines “digital assets” as intangible “asset[s] that [are] issued and transferred using distributed ledger or blockchain technology.” Statement on Digital Asset Securities Issuance and Trading, Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets, SEC (Nov. 16, 2018), available here.

2 SEC v. LBRY, Inc., No. 1:21-cv-00260-PB (D.N.H. filed Mar. 29, 2021), available here. A copy of the complaint against LBRY can be found here.

3 See, e.g., Gary Gensler, Speech – “A ‘New’ New Era: Prepared Remarks Before the International Swaps and Derivatives Association Annual Meeting” (May 11, 2022) (“My predecessor Jay Clayton said it, and I will reiterate it: Without prejudging any one token, most crypto tokens are investment contracts under the Supreme Court’s Howey Test.”), available here. Section 5(a) of the Securities Act of 1933 (the “Securities Act”) provides that, unless a registration statement is in effect as to a security, it is unlawful for any person, directly or indirectly, to sell securities in interstate commerce. Section 5(c) of the Securities Act provides a similar prohibition against offers to sell or offers to buy securities unless a registration statement has been filed.

4 SEC v. W.J. Howey Co., 328 U.S. 293 (1946). This case did not address when digital assets could be deemed debt securities under the test articulated by the U.S. Supreme Court in Reves v. Ernst & Young, 494 U.S. 56, 66-67 (1990), or when digital assets could be deemed an investment company under the Investment Company Acy of 1940. See, e.g., In the Matter of Blockfi Lending, Feb. 14, 2022, available here. This case also does not address when a digital asset is a security-based swap. See, e.g., In the Matter of Plutus Financial, Inc., (July 13, 2020), available here.

5 The argument a digital asset is not a security because it has “utility” is a favorite argument of critics of the SEC’s enforcement actions against issuers of digital assets. Unfortunately, the “utility” argument appears to be of little merit when the digital asset is offered and sold to raise capital.

6 This is an argument that has been made by a number of defendants in SEC enforcement actions involving digital asset securities.

Regulation by Definition: CFPB Broadens Definition of “Unfairness” to Rein in Discrimination

In a significant move, the CFPB announced on March 16 a revision to its supervisory operations to address discrimination outside of the traditional fair lending context, with future plans to scrutinize discriminatory conduct that violates the federal prohibition against “unfair” practices in such areas as advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.  Specifically, the CFPB updated its Exam Manual for Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs) noting that discrimination may meet the criteria for “unfairness” by causing substantial harm to consumers that they cannot reasonably avoid.

With this update, the CFPB intends to target discriminatory practices beyond its use of the Equal Credit Opportunity Act (ECOA) – a fair lending law which covers extensions of credit – and plans to also enforce the Consumer Financial Protection Act (CFPA), which prohibits UDAAPs in connection with any transaction for, or offer of, a consumer financial product or service.  To that end, future examinations will focus on policies or practices that, for example, exclude individuals from products and services, such as “not allowing African-American consumers to open deposit accounts, or subjecting African-American consumers to different requirements to open deposit accounts” that may be an unfair practice where the ECOA may not apply to this particular situation.

The CFPB notes that, among other things, examinations will (i) focus on discrimination in all consumer finance markets; (ii) require supervised companies to include documentation of customer demographics and the impact of products and fees on different demographic groups; and (iii) look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.

In a statement accompanying this announcement, CFPB Director Chopra stated that “[w]hen a person is denied access to a bank account because of their religion or race, this is unambiguously unfair . . . [w]e will be expanding our anti-discrimination efforts to combat discriminatory practices across the board in consumer finance.”

Putting it Into Practice:  This announcement expands the CFPB’s examination footprint beyond discrimination in the fair lending context and makes it likely that examiners will assess a company’s anti-discrimination programs as applied to all aspects of all consumer financial products or services, regardless of whether that company extends any credit.  By framing discrimination also as an UDAAP issue, the CFPB appears ready to address bias in connection with other kinds of financial products and services.  In particular, the CFPB intends to closely examine advertising and marketing activities targeted to consumers based on machine learning models and any potential discriminatory outcomes.

Article By Moorari Shah and A.J. S. Dhaliwal of Sheppard, Mullin, Richter & Hampton LLP

For more financial legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

Venmo’ Money: Another Front Opens in the Data Wars

When I see stories about continuing data spats between banks, fintechs and other players in the payments ecosystem, I tend to muse about how the more things change the more they stay the same. And so it is with this story about a bank, PNC, shutting off the flow of customer financial data to a fintech, in this case, the Millennial’s best friend, Venmo. And JP Morgan Chase recently made an announcement dealing with similar issues.

Venmo has to use PNC’s customer’s data in order to allow (for example) Squi to use it to pay P.J. for his share of the brews.  Venmo needs that financial data in order for its system to work.  But Venmo isn’t the only one with a mobile payments solution; the banks have their own competing platform called Zelle.  If you bank with one of the major banks, chances are good that Zelle is already baked into your mobile banking app.  And unlike Venmo, Zelle doesn’t need anyone’s permission but that of its customers to use those data.

You can probably guess the rest.  PNC recently invoked security concerns to largely shut off the data faucet and “poof”, Venmo promptly went dark for PNC customers.  To its aggrieved erstwhile Venmo-loving customers, PNC offered a solution: Zelle.  PNC subtly hinted that its security enhancements were too much for Venmo to handle, the subtext being that PNC customers might be safer using Zelle.

Access to customer data has been up until now a formidable barrier to entry for fintechs and others whose efforts to make the customer payment experience “frictionless” have depended in large measure on others being willing to do the heavy lifting for them.  The author of Venmo article suggests that pressure from customers may force banks to yield any strategic advantage that control of customer data may give them.  So far, however, consumer adoption of mobile payments is still miniscule in the grand scheme of things, so that pressure may not be felt for a very long time, if ever.

In the European Union, the regulators have implemented PSD2 which forces a more open playing field for banking customers. But realistically, it can’t be surprising that the major financial institutions don’t want to open up their customer bases to competitors and get nothing in return – except a potential stampede of customers moving their money. And some of these fintech apps haven’t jumped through the numerous hoops required to be a bank holding company or federally insured – meaning unwitting consumers may have less fraud protection when they move their precious money to a cool-looking fintech app.

A recent study by the Pew Trusts make it clear that consumers are still not fully embracing mobile for any number of reasons.  The prime reason is that current mobile payment options still rely on the same payments ecosystem as credit and debit cards yet mobile payments don’t offer as much consumer protection. As long as that is the case, banks and fintechs and merchants will continue to fight over data and the regulators are likely to weigh in at some point.

It is not unlike the early mobile phone issue when one couldn’t change mobile phone providers without getting a new phone number – that handcuff kept customers with a provider for years but has since gone by the wayside. It is likely we will see some sort of similar solution with banking details.

Copyright © 2020 Womble Bond Dickinson (US) LLP All Rights Reserved.

For more on fintech & banking data, see the National Law Review Financial Institutions & Banking law page.

IOSCO Releases Report on Fintech

IOSCO Fintech financial technologyThe International Organisation of Securities Commissions (IOSCO) has released a new report that says that changes resulting from FinTech are testing the boundaries of full disintermediation through the use of technology.  IOSCO is the international body that brings together the world’s securities regulators and is a global standard setter for the securities sector. IOSCO develops, implements and promotes adherence to internationally recognised standards for securities regulation. It works with the G20 and the Financial Stability Board on the global regulatory reform agenda.

The report incorporates the finding of three surveys:

  1. the Committee on Emerging Risks (CER) and the Growth and Emerging Markets Committee (GEMC) survey to gain further insight on the types of FinTech firms in respective jurisdictions, key regulatory actions taken by members, and the practices of FinTech firms in onboarding investors;

  2. the CER, the Affiliate Members Consultative Committee, and World Federation of Exchanges survey on distributed ledger technology; and

  3. a GEMC survey reviewing the state of development of FinTech in emerging markets, including existing and potential regulatory implications.

The report particularly examines:

  • Financing Platforms, including Peer-to-Peer (P2P) lending and equity crowdfunding (ECF)

  • Retail Trading and Investment Platforms, including robo-advisers and social trading and investing platforms

  • Institutional Trading Platforms, with a specific focus on innovation in bond trading platforms

  • Distributed Ledger Technologies (DLT), including application of the blockchain technology and shared ledgers to the securities markets.

ARTICLE BY Jonathan Lawrence of K&L Gates

Copyright 2017 K & L Gates

The Post-Election FinTech World: Are Happy Days (for Bankers) Here Again?

Fintech financial technologyIn the days following the U.S. federal elections that resulted in the election of Donald Trump as President and Republican control of the 115th Congress, FinTech companies, banks, and other financial institutions are increasingly asking whether they still need to worry about compliance with the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), Consumer Financial Protection Bureau (“CFPB”) regulatory actions, and other financial services regulations.

It is true that there will likely be some significant regulatory changes, but it is a little too early for industry participants to pop the champagne corks.  Here are our thoughts about some of the top issues impacting FinTech companies, banks, and other financial institutions:

Dodd-Frank and the CFPB

Created under Dodd-Frank in response to the financial crisis of 2007–2008, the CFPB’s stated aim is “to make consumer financial markets work for consumers, responsible providers, and the economy as a whole.”  Since its inception, the CFPB has regulated the consumer financial services marketplace through sweeping rulemakings, including the recent issuance of a long-awaited final rule for prepaid accounts.[1]  Precedent-setting enforcement actions also have been increasingly utilized by the CFPB in lieu of, or as a precursor to, rulemakings promulgated in accordance with the Administrative Procedure Act.  Policymakers, banks, and others within the broader financial services industry have criticized the CFPB for regulatory overreach and for imposing burdensome, duplicative regulations on market participants that ultimately impact on consumer choice.[2]

It is no surprise, therefore, that revising the CFPB’s structure and operations to try to make the agency more transparent and accountable is among the top priorities of both the incoming Administration and Congress as part of reform of Dodd-Frank.  Some version of House Financial Services Committee Chairman Jeb Hensarling’s (R-TX) financial reform legislation (H.R. 5983, the “Financial CHOICE Act” or “FCA”), will undoubtedly serve as a basis for any reform efforts undertaken in the early days of the Trump Administration and the new Congress.  Although the CFPB will likely survive in the new Administration and Republican-led House and Senate, the FCA furnishes a blueprint for the kinds of reforms that likely will be made.

The FCA contains provisions that would make significant modifications to the structure of the CFPB by making it an independent agency outside of the Federal Reserve to be headed by a five-member commission, instead of a single director.  The FCA would rename the CFPB the “Consumer Financial Opportunity Commission” and would give the agency the mission of consumer protection and competitive markets.  The FCA would also subject the CFPB’s funding to the Congressional appropriations process.  The FCA also includes provisions designed to address the CFPB’s use of enforcement actions by repealing the agency’s authority over “abusive practices” in the consumer financial services industry.  In addition, the FCA also contains H.R. 5413, the “CFPB Data Accountability Act,” which would require the CFPB to verify a consumer complaint prior to posting it on the CFPB’s website.

Durbin Amendment

The FCA also contains a provision that would repeal the “Durbin Amendment,” which limited the interchange fees that banks charge merchants to process electronic debit transactions.  Following enactment of Dodd-Frank, many payments industry participants raised concerns that small banks and low-and moderate-income consumers have been adversely impacted by the Durbin Amendment, while retailers have disproportionately benefited.  Given the anticipated focus of the Trump Administration and new Congress on the promotion of financial market innovation and competitiveness, it is increasingly likely that changes to this provision could be considered as part of broader financial regulatory reform efforts.  Whether it will be entirely repealed is another question.  Merchants, who fought hard for the Durbin Amendment by arguing that the high fees imposed by major banks and the payment networks were unfair, can be expected to vigorously oppose such an effort.

Regulatory Outlook

The regulatory outlook for the CFPB for the near future will likely be impacted by a number of important factors, including the outcome of the CFPB’s recent petition to the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”), which requested the full D.C. Circuit to rehear PHH Corp. v. CFPB.[3]  The petition follows the recent holding in PHH by a three-judge panel of the D.C. Circuit that the CFPB’s existing structure is unconstitutional and that the director of the CFPB serves at the pleasure of the President.[4]  President-elect Trump currently has the ability to remove current CFPB Director Richard Cordray “for cause” and to nominate a replacement to be confirmed by the Senate.  Such a change in the director of the CFPB before the D.C. Circuit makes a decision on whether to rehear PHH could have significant implications for the CFPB’s regulatory activities.  Republicans in the 115th Congress also are expected to use the Congressional Review Act (“CRA”) to repeal certain regulations recently issued during the Obama Administration.  However, many of the CFPB’s rules are expected to remain in place but be subject to additional Congressional scrutiny.  Notably, some Congressional Republicans have previously expressed concerns about the broad scope of the CFPB’s rule on prepaid accounts, although it is not yet clear whether the rule will be among the regulations that could be the focus of repeal efforts through use of the CRA.  Additionally, Congressional Republicans will likely subject the CFPB’s operations to heightened oversight and will probably seek to repeal the agency’s authority to prohibit arbitration agreements and to issue guidance related to indirect automobile lending.

Enforcement Outlook Generally

Although the CFPB’s activities may be reduced through reformation of the agency or an appreciable change in its leadership, such changes are also likely to be accompanied by heightened regulatory and enforcement efforts by state government officials and an increase in efforts by consumers to seek redress in the courts.  Anticipating that the incoming Administration could result in a reduction of enforcement activities against banks and financial institutions at the federal level, many state attorneys general are indicating that they will step into the vacuum to protect consumers if necessary.  It has been widely reported,[5] for example, that both New York and California attorneys general intend to fill any regulatory enforcement void created by the incoming Administration.  Nevertheless, a shift in the CFPB’s enforcement priorities may have a lasting impact on financial institutions and financial markets.

Conclusion

Going forward, payments companies and other consumer financial services industry participants should certainly monitor changes in laws, regulations, and enforcement actions closely as they seek to better understand these changing legal and regulatory dynamics and the nature of the regulations with which they will be required to comply.

ARTICLE BY Judith E. Rinearson & Eric A. Love of K & L Gates
Copyright 2016 K & L Gates

[1] See, Eric A. Love, Judith Rinearson and Linda C. Odom, CFPB Finalizes Expansive Prepaid Account Rule Creating New Compliance Hurdles, K&L Gates Legal Insight, (Nov. 2016), https://www.fintechlawblog.com/wp-content/uploads/2016/11/FinTech-blog-4….

[2] See, e.g., Press Release, House Financial Services Committee, Who will protect consumers from the overreach of the Consumer Financial Protection Bureau? (Mar. 3, 2015), http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=3….

[3] See, Respondent Consumer Financial Protection Bureau’s Petition for Rehearing En Banc, No. 15-177 (D.C. Cir. Nov. 18, 2016) (Doc. #1646917).

[4] See, PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016).

[5] See, e.g., Joel Stashenko, Trump Presidency Could Shift Regulatory Spotlight to State and AG, N.Y. Law Journal, Nov. 14, 2016.

Insight into Future of Financial Technology Companies – Swimming with “Fintechs”

Fintech financial technologyImagine applying for a mortgage or commercial loan on Amazon or shopping for a checking account via an App on your Iphone. As many in the financial services industry may already know, there are a new brand of startups known as “Fintech” companies who are rapidly becoming viable alternatives to traditional wealth management. “Fintech,” which is abbreviated from financial technology, are various startup companies who are utilizing technology to make traditional financial services more efficient – for example, mobile payments, money transfers, loans, fundraising and asset management. Fintech companies can provide users with a variety of financial services that were once exclusively within the purview of a traditional bank (from facilitating investments, financial planning to underwriting). Fintech startups are geared towards giving the consumer a more personalized and efficient product than currently exists. If the trends continue, Fintech companies will cause the technological areas of consumer banking to undergo significant changes.

Fintech companies are capitalizing on digital technology to transform the way consumers access financial services and information.

As many Lenders know, consumers are increasingly demanding customer centric solutions that give instantaneous, tailored responses based on that individual consumer’s needs. A Fintech company can use technology to create a personalized solution for the demanding consumer.

Fortunately for the industry, the emergence of Fintech companies may not be all bad. Lenders who play their cards right may even be able to use a Fintech startup to their advantage. Cooperation between a lender and one or more of these startups could lead to symbiotic relationships. For example, some Fintech companies eliminate the need for financial advisors by providing apps that enable users to keep track of their spending and stay on budget. A Lender with foresight could partner with a Fintech company and offer this service on its own banking platform.

There are three things to look forward to with regards to how Fintech companies will revolutionize the financial services industry:

  • Fintech companies will cut costs and improve the quality of certain financial services as they are unburdened by regulators (so far…).

  • Fintech companies will create new ways of assessing risk. By utilizing machine learning and logistics, Fintech startups will change the landscape of risk assessment.

  • Fintech companies will lead to a more diverse credit landscape. Most Fintech firms are internet based, meaning they are less geographically concentrated than traditional lenders.

Cooperation and partnership will be crucial to a lender/ Fintech relationship. Clearly, Fintech startups will benefit from the reputation, stability, experience and client base of a traditional lender. However, the lenders must be acutely aware of possible legal repercussions of a Fintech partnership. It will be incumbent upon lender to assess the legal risks and regulatory challenges of partnering with these startups.

If in the end a lender can successfully navigate the risks, the upside will likely be worth it. After all, if history has taught us anything, it is that technology should be embraced rather than repudiated.

Article By Alena C. Gfeller & Donald Griffith II of Murtha Cullina

© Copyright 2016 Murtha Cullina

OCC Releases White Paper Discussing Plans For Understanding and Evaluating Financial Technology Innovations

The Office of the Comptroller of the Currency has released a White Paper that discusses the agency’s attitudes and approaches to developments in financial technology, and to the associated innovations that the fintech industry has brought, and continues to bring, at an ever-increasing pace, to banks and others in the financial-services industry.

Fintech innovations come both from within the financial-services industry and from nonbank companies, which may want to offer their products or services as vendors to financial institutions, or, instead, partner with such institutions in offering new services to bank customers.

The White Paper enumerates eight “guiding principles” that the agency says it has formulated “to guide the development of its framework for understanding and evaluating innovative products, services, and processes that OCC-regulated banks may offer or perform.” The term “responsible innovation” occurs throughout the principles, and, indeed, throughout the White Paper.

The principles reflect the OCC’s longstanding emphasis on the importance of such matters as assuring fair access to financial services and fair treatment of customers; giving due attention to effective risk management and preserving safe and sound operations; encouraging all banks to integrate responsible innovation into their strategic planning; promoting effective outreach; and collaborating with other regulators.

Speaking at the American Banker Retail Banking Conference in Las Vegas on April 7, Comptroller of the Currency Thomas J. Curry discussed the White Paper, the agency’s development of it, and some of what the agency hopes it will achieve: “We at the Office of the Comptroller of the Currency want to support efforts by federal banks to innovate, but we also want to be sure that they do so in a responsible way that doesn’t threaten the safety of the system or the financial well-being of bank customers.” He added: “Banks engaged in responsible innovation need to strike the right balance between providing benefits to consumers and businesses with sound risk management.”

The agency says it is considering several alternative structures and methods for understanding and evaluating the new products, services, and techniques, and the related innovations available through use of fintech devices and applications, and how the regulatory and supervisory framework administered by the OCC, and the business plans of the institutions that it supervises, most effectively and efficiently can assure that the benefits of these innovations can be made available to customers, while preserving safety and soundness, and without limiting or restricting the public’s access to financial services, or putting at undue risk the protection of privacy and data security that both commercial and consumer customers of banks now demand.

“Banks of all sizes will need to ensure appropriate risk management plans are in place when considering new products, services and technologies, using models and managing third-party relationships,” Curry said in his Las Vegas speech. “The OCC’s framework will describe ways that national banks and federal savings associations identify and address risks resulting from emerging technology.”

One proposal under consideration is the creation by the OCC of a centralized office on innovation. Presently, according to the paper, “banks and nonbanks use a variety of formal and informal entry points to communicate with the OCC”—one bank that’s interested in an innovative payments process may approach its examiners, for example, while another may seek guidance by inquiring of OCC legal staff whether it would need to obtain a legal opinion before offering or using a new process, and another may “contact one of the agency’s experts on credit, compliance, payments, cybersecurity, or modeling. While providing flexibility, the current process can result in some inconsistencies and inefficiencies.”

The White Paper concludes with a series of nine questions on which the OCC requests public comment, covering such areas as what steps the OCC can take to facilitate responsible innovation by banks and thrifts, what the agency can do to help community bankers better incorporate innovation into their strategic planning processes, and what forms of outreach and information-sharing are most effective.

The paper notes that some fintech innovations have been successful in expanding the access of underserved customers to financial services. Survey data indicate that underserved communities are more likely to use mobile banking technology than “fully banked” communities. Moreover, it adds: “Current innovations in the financial industry hold great promise for increasing financial inclusion of underserved consumers, who represent more than 68 million people and spend more than $78 billion annually.”

At the same time, the paper points out, “Brick-and-mortar branches are a stabilizing force in low-income neighborhoods, and innovative technology should not be seen as a substitute for a physical presence in those communities.” The paper says that the agency may issue guidance “on its expectations related to products and services designed to address the needs of low- to moderate-income individuals and communities,” including “promoting awareness of other activities that could qualify for Community Reinvestment Act consideration.”

ARTICLE BY George A. LeMaistre, Jr. of Jones Walker LLP
© 2016 Jones Walker LLP