On November 30, 2016, the Illinois Department of Financial and Professional Regulation (IDFPR) issued a proposed “Digital Currency Regulatory Guidance” (the Guidance) regarding the application of the Illinois Transmitters of Money Act (TOMA) to various digital currency activities. The Guidance applies only to “decentralized digital currencies,” which are not issued by a particular person or entity, do not have a central administrator, and do not have a central repository. Therefore, the Guidance would apply to activities involving Bitcoin and most other cryptocurrencies. The IDFPR is accepting comments on the Guidance until January 18, 2017. To read more, click here.
On Friday December 2nd, the Officer of the Comptroller of the Currency (OCC) announced that it would consider granting financial technology (fintech) firms special purpose national bank charters. The OCC’s proposal constitutes a major development for fintech companies and the financial services industry more generally. This move builds on recent actions taken by the OCC in an attempt to promote financial innovation, including releasing a white paper regarding responsible innovation in the financial industry in March, and announcing the creation of an Office of Innovation in October.
Under the OCC’s proposed framework, fintech companies may apply for a special purpose national bank charter—the same type of charter that the OCC has granted primarily to trust banks and credit card banks. In a release summarizing the proposal, the OCC claims that the proposed system will improve safety and soundness of fintech institutions, promote consistency in the application of laws and regulations, ensure fair treatment of customers, and strengthen the federal banking system. Comptroller of the Currency Thomas J. Curry also explained that the banking system will be healthier if fintech companies “enter the system through a clearly marked front gate, rather than through some back door.”
In a panel at the Securities and Exchange Commission’s recent forum on Innovation in FinTech, experts discussed blockchain’s potential role in corporate processes such as by providing an unalterable history of transactions, by tracking products and documents throughout their lifecycles, and by dividing the risks and costs of maintaining an authoritative system of record among multiple parties. While the blockchain presents some implementation challenges and technical limitations, it provides opportunities for cost-savings and efficiencies for industries ranging from financial markets, insurance and mortgages to music and art. To read more, click here.
On, November 2, 2016, during its weekly meeting, the Swiss Federal Council (the Council), the executive council which serves as the collective executive head of the government of Switzerland, requested an easing of the Swiss regulatory framework for providers of innovative financial technologies (FinTech). The Council stated that it desires forward thinking comprehensive solutions for the emerging FinTech industry and is thus recommending an approach with three elements: (1) provisions regarding holding money in settlement accounts, which is helpful to crowdfunding services; (2) a regulatory FinTech innovation sandbox, which would include the current money laundering provisions but otherwise would not (yet) require monitoring by the Swiss Financial Market Supervisory Authority (FINMA); and (3) a new fintech license granted by FINMA, for institutions restricted to the deposit-taking business (acceptance of public funds) and thus not operating in the lending business, allowing less stringent regulatory requirements to apply rather than heavier regulatory burdens imposed on classical banks, including lower capital requirements.
State attorneys General (AGs) continue to emerge as major regulators of financial services and show little sign of being cowed by their federal counterparts….or efforts to preempt state authority.
This week, representatives of the consumer protection divisions of the AGs of nearly all 50 states plus officials from the FTC and CFPB met in Phoenix to compare notes and coordinate activity on a range of issues impacting consumers. The meeting was sponsored by the National Association of Attorneys General (NAAG) which serves an educational function for AG offices, and also coordinates legal and policy issues to serve its AG members. Issues discussed at NAAG meetings often signal the onset of increased legal and regulatory activity by AGs.
Among the issues addressed, none was more prominent that those involving consumer financial services. Key panels at the meeting addressed state involvement in FinTech, Payday Lending and Structured Settlements.
“FINTECH – The New Frontier” in particular was keyed up for prominent discussion and included briefings by the FTC, the Utah Department of Financial Institutions and academics. A particular theme that emerged that should be top of mind for FinTech companies is that many AGs believe they already have the tools to regulate and pursue legal matters regarding FinTech under state consumer protection statutes governing unfair or deceptive acts and practices (aka, “UDAP” laws) notwithstanding that new products may not be subject to laws specifically addressing them. Another area of concern, particularly for non-bank FinTech firms hoping for some relief from state-by-state regulatory compliance and enforcement through potential preemptive rules by the OCC, is that efforts to preempt state actions and regulations with respect to FinTech will be widely resisted by the states.
In light of this, as FinTech firms continue to expand and refine their products, they would do well to keep their eye on activities in the states.
Robert Jaworski reviews the September 27, 2016, Consumer Financial Protection Bureau (CFPB) Consent Order (the “Order”) with Flurish, Inc d/b/a LendUp (LendUp), a startup online lending company based in San Francisco that offers single-payment loans and installment loans in 24 states. The Order sends a powerful message to online lenders to make sure their legal houses are in order before opening their doors to customers. Read more.
Article III of the U.S. Constitution limits federal courts’ jurisdiction to actual cases and controversies only. When a plaintiff seeks to sue in federal court despite having suffered no actual injury, the Constitution’s case or controversy requirement is not satisfied and the case cannot proceed. In other words, when a plaintiff has suffered no injury, he or she lacks standing to sue in federal court.
This principal was central to the U.S. Supreme Court’s recent decision in Spokeo, Inc. v. Robins. In that case, the high court considered whether Plaintiff Thomas Robins satisfied the case or controversy requirement where he alleged that Spokeo committed a mere technical violation of a consumer protection statute (in this case, the Fair Credit Reporting Act or “FCRA”), but where Plaintiff did not allege any actual harm.
Plaintiff alleged that Spokeo disseminated false information on the Internet related to his wealth and education, causing him to fear that potential employers would rely on inaccurate information when evaluating his applications for employment. Spokeo countered that Plaintiff’s fear that potential employers would rely on inaccurate information, without more, did not constitute actual harm.
A district court judge ruled in 2010 that Plaintiff lacked standing to sue in federal court because he suffered no actual injury. In 2014, the Ninth Circuit reversed, ruling that the alleged FCRA violation amounted to an actual injury.
On Monday, in a 6-2 decision written by Justice Samuel Alito, the Supreme Court ruled that Article III requires allegations of concrete injury, notwithstanding the alleged FCRA violation. While the Court reaffirmed that “[t]he violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury-in-fact,” the majority held that “Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right[.]”
“Article III standing requires a concrete injury even in the context of a statutory violation[,]” Justice Alito wrote. “For that reason, [Plaintiff] could not … allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.”
While the decision is not a panacea to the wave of consumer protection suits being filed against FinTech companies, the Court’s endorsement of a concrete injury standard bodes ill for plaintiffs bringing “gotcha” statutory lawsuits.
On April 25, Reed Smith hosted a FinTech lunch event at its London offices, led by partners Tamara Box, Nola Beirne, Jacqui Hatfield, Cynthia O’Donoghue, Claude Brown, Simon Grieser, Mike Young and Mark Melodia. Our external guests and Reed Smith lawyers were joined by our guest speaker Adam Afriyie, MP for Windsor and Chair of the Parliamentary Office of Science and Technology.
Adam Afriyie MP discussed the challenges and opportunities facing FinTech companies, reiterating the importance that the current government places on FinTech policy. Adam strongly believes that business enterprise, and in particular, FinTech, is the way of the future for Britain and that, from a regulatory perspective, Britain is the most enterprise- and business-friendly place on earth. He found it hard to identify problems with the regulatory environment for FinTech and shared his long term hope that, once the deficit is under control, UK corporation tax will be lowered to encourage more companies to invest in Britain. Adam challenged the floor to consider any regulatory challenges facing the FinTech market, urging the audience to think of constructive points to take to Westminster.
From the Reed Smith side, Jacqui Hatfield spoke on FCA regulation and Project Innovate, where new and established businesses (both regulated and non-regulated) are able to introduce innovative financial products and services to the market. The project is part of a regulatory ‘sandbox’, i.e., a ‘safe space,’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of pilot activities.
Reed Smith’s Cynthia O’Donoghue then discussed the wider FinTech landscape, calling for a new attitude of embracing technology to take FinTech to the next level, rather than as a ‘disruptor’. Cynthia reiterated the importance of financial services companies embracing FinTech and gave the example of insurance black boxes and banking apps on phones as examples of where FinTech is making a real difference to society. She also emphasised that all new FinTech opportunities are dependent on trust from the public. If the public doesn’t trust them, the projects won’t get off the ground.
Finally, Reed Smith’s Mike Young discussed the FinTech environment in the UK from a fundraising and development perspective. He mentioned that £500 million in fundraising was raised by FinTech companies in 2015, and that a quarter of tech mergers globally happened in the UK in 2015. This reiterated Adam’s point that the UK is the most business-friendly place in the world for regulation.
For more information on Reed Smith’s global FinTech practice, click here.
The Consumer Financial Protection Bureau has published its long anticipated 377-page proposed rule to bar banks and regulated financial institutions from including class action waivers in mandatory arbitration provisions in consumer contracts.
Mandatory arbitration clauses, and class action waivers, are pervasive in financial contracts. According to a study by the CFPB in 2015 arbitration clauses are used by 53% of credit card contracts, 44% of checking account agreements, 92% of prepaid card agreements, and 84% of storefront payday loan agreements.
The proposed rule would prohibit covered institutions from “using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into their arbitration agreements reflecting this limitation.” The rule would apply to a range of financial products, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto and title loans, payday and installment loans, and student loans. Under the proposal, institutions would also be required to submit records of arbitral proceedings to the CFPB. According to the Bureau, it “intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action.”
The proposed rule does not go so far as to outright ban mandatory arbitration clauses in full. But if implemented, the rule would likely have the practical effect of ending most consumer arbitrations because financial institutions will be reluctant to incur costs defending class actions while paying for arbitration.
The proposed rule will be open to public comment for ninety days, and a final rule is anticipated possibly by mid-2017. The CFPB has stated that the rule would have an effective date 30 days after publication of the final rule.
The CFPB’s proposal is consistent with regulators general pushback against arbitration. The CFPB already prohibits mandatory arbitration of disputes related to most mortgage loans and home equity agreements. Mandatory arbitration provisions are also barred from payday loans, vehicle-title loans and similar transactions involving members of the military. In the brokerage industry, the Financial Industry Regulatory Authority bars firms from prohibiting participation in class actions. The Labor Department’s newly published fiduciary-duty rule for financial advisers will permit only arbitration clauses that do not include a class waiver. The Department of Education and The Centers for Medicare and Medicaid Services are likewise considering restrictions on arbitration.
UPDATE: The proposed rule has been published and is open for public comment until August 22, 2016.
The Consumer Financial Protection Bureau (“CFPB”) has announced its first data security enforcement action. On Wednesday (March 2), the CFPB released a consent order against Dwolla, an online payment platform company, alleging it failed to maintain adequate data security practices despite representations made on the company website and in communications with consumers that the company has implemented practices that exceed industry standards. As a result, Dwolla must pay out $100,000 in penalties and endeavor to repair its security initiatives.
In a statement released in tandem with news of the charges, CFPB Director Richard Cordray said: “Consumers entrust digital payment companies with significant amounts of sensitive personal information. With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”
Under the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (“CFPA”), the CFPB is authorized to take action against institutions engaged in unfair, deceptive or abusive acts or practices (“UDAAP”), or that otherwise violate federal consumer financial laws. This consent order is particularly noteworthy because it indicates the CFPB’s belief that the CFPA provides the agency with the authority to police data security practices in the financial space. Financial institutions should prepare for increased CFPB activity in the areas of data security and privacy.