State AGs Double Down Focus on Financial Services, including FinTech

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.

CFPB Takes Enforcement Action Against FinTech Lender

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.



Supreme Court Clarifies Injury-In-Fact Standing Requirement in Spokeo, Dealing Impediment to “Gotcha” Statutory Lawsuits

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.

Reed Smith hosts FinTech roundtable discussion

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.

Jacqui photo

CFPB Moves Forward With Proposal To Ban Class Action Waivers In Arbitration

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.

CFPB Takes First Action Against Company for Lax Data Security Practices

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.

FSB Eyeing Global Stability of FinTech Companies

Financial Stability Board chairman Mark Carney has announced that global regulators are evaluating potential stability implications that emerging financial technology poses to the global financial system and hinted that a regulatory framework in some form is all but inevitable.
The announcement came in a February 22, 2016 letter from Carney to the G20 Finance Ministers and Central Bank Governors detailing the FSB’s work program for 2016. In his letter, Carney emphasizes the importance of continued progress in building resilient financial institutions and markets, a task that now requires the FSB to closely assess the “systemic implications of financial technology innovations, and the systemic risks that may arise from operational disruptions” to traditional financial institutions and infrastructure.
The FSB’s announcement acknowledges the growing importance of FinTech and regulators’ need to catch up—hopefully without stifling innovation. “The regulatory framework must ensure that it is able to manage any systemic risks that may arise from technological change without stifling innovation,” Carney wrote.
The FSB will present its initial findings at its March meeting, with next steps anticipated in April.

Marketplace Lending : Summary of Industry Comments

Reed Smith has issued the first comprehensive white paper discussing the comments submitted in response to Treasury’s July 2015 Request for Information (RFI) on marketplace lending. The RFI, entitled “Public Input on Expanding Access to Credit through Online Marketplace Lending,” sought public comment on the FinTech business models applicable to online lending, the potential for marketplace lending to expand access to credit, and how the financial regulatory framework should evolve to support the safe growth of this industry. The RFI drew responses from FinTech companies, banks, industry and consumer groups, politicians, agencies, and other concerned parties. Reed Smith’s FinTech team reviewed and summarized the comments, and is proud to provide this FinTech Report on the key responses, and the themes, arguments and proposals contained in its pages.

Download full report here: FinTech Report – Summary of Responses to Treasury RFI on Marketplace Lending.

Payday Lender SOL

On January 15, 2016, the CFPB Office of Enforcement asserted that claims pursued in administrative enforcement actions are not subject to the three-year statute of limitations set forth in the Consumer Financial Protection Act, signaling that the agency is willing to target long-ago violations when seeking restitution and penalties. The CFPA — also known as Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act — is the statute that empowers the CFPB to administratively enforce the federal consumer financial laws.

The Integrity Advance enforcement proceeding involves conduct that allegedly stopped in December 2012. The CFPB alleged that a payday lender misled consumers by disclosing that loans could be repaid in a single payment when, in fact, the loans would roll over automatically because payments were applied to finance charges instead of to principal. The CFPB also alleged violations of the Electronic Fund Transfer Act, the Truth in Lending Act, and the CFPA’s prohibition of unfair, deceptive, or abusive acts or practices against the lender.

The CFPB put forth its statute of limitations argument in a brief opposing a motion to dismiss filed in its administrative proceeding against Integrity Advance, LLC. In making this argument, the CFPB is breaking new legal ground. Previously, the agency had argued that the CFPA SOL does not apply to claims brought by the CFPB under its CFPA administrative action authority alleging violations of the Real Estate Settlement Procedures Act. Now, it is extending that argument to claims alleging violations of the CFPA’s prohibition of unfair, deceptive, or abusive acts or practices.

Read more at our client alert here.

Settlement Offer Can’t Moot Consumer Lawsuits

In a 6-3 decision issued today, the Supreme Court ruled that defendants cannot rely on a strategic offer of judgment to the named plaintiff to moot the claims of the putative class.

After an unfavorable Ninth Circuit decision, U.S. Navy contractor Campbell-Ewald asked the high court to consider, inter alia, whether defendants can strategically offer individual plaintiffs full relief at the outset of the litigation to avoid a long court battle or a potential multi-million dollar class settlement.

The opinion, delivered by Justice Ginsburg, held “in accord with Rule 68 of the Federal Rules of Civil Procedure, that an unaccepted settlement offer has no force. Like other unaccepted contract offers, it creates no lasting right or obligation. With the offer off the table, and the defendant’s continuing denial of liability, adversity between the parties persists.”

The Rule 68 strategy, which had been endorsed by the Seventh Circuit and certain district courts at various points in time, had been used by class action defendants to help combat the wave of TCPA litigation over the past few years.

Particular to FinTech, today’s decision is likely to have wide-reaching consequences in the risk assessment of consumer class action cases. Emerging FinTech companies are increasingly becoming the target of class actions, particularly in cases that involve statutory penalties that can escalate quickly. Ensuring compliance with the alphabet soup of consumer protection regulation is pivotal to decreasing the risk of certification if such a claim is brought.

The full decision can be read here: Campbell-Ewald v. Gomez Slip Opp.