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FTC sues fintech firm for deceiving users and making cancelations difficult
On November 3, the FTC filed suit against a fintech firm within the U.S. Southern District Court of New York. The FTC alleged the fintech mobile app misled customers, “violated Section 5 of the FTC Act[,] and made it hard to cancel services in violation of the Restore Online Shoppers’ Confidence Act (ROSCA).” However, the FTC and Defendant stipulated the entry of a proposed settlement order that includes a monetary judgment of $18 million for consumer refunds and requires Defendant to stop its deceptive marketing practices and end tactics that prevented customers from canceling services. The first time the FTC had collected civil penalties under ROSCA was in January 2023, as covered by InfoBytes here.
The FTC’s complaint alleges that consumers were deceived into signing up for a $250 cash advance, but many users were unable to receive any money at all. Furthermore, consumers had to have first entered a $9.99 monthly membership––regardless of whether they qualified for the $250 or not. Further, if a user wished to cancel their monthly membership, the fintech firm employed “dark” and manipulative design tricks to “create a confusing and misleading cancellation process that prevented consumers from canceling their subscriptions.” The FTC’s proposed settlement order must first be approved by a federal judge before it can go into effect.
OCC releases commercial lending bulletin on venture loans
On November 1, the OCC issued a bulletin on “commercial loans to early-, expansion-, and late-stage companies,” which it referred to as “venture loans.” The OCC explained that although “venture lending supports new business formation and can improve access to capital for growth companies… new business ventures have a high probability of failure.” Accordingly, the bulletin, which “applies to all OCC-regulated banks, including community banks, that engage in or are considering engaging in venture lending,” provides guidance on the agency’s expectations for risk management and risk-rating of venture loans.
The bulletin expressly exempts “[f]ully monitored and controlled asset-based loans (ABL) to early-, expansion-, and late-stage companies,” from the guidance. In addition, the OCC does not categorize the following types of credit as venture loans:
- Loans to businesses that primarily rely on internal cash flow, rather than equity investments, for their growth;
- Loans made under government-backed lending support programs where federal, state, or local guarantees sufficiently reduce credit risk (e.g., SBA guarantees); and
- Loans made under special purpose credit programs (SPCP).
Fed’s Vice Chair remarks on payments innovation, CBDCs, and financial inclusion
On October 27, Fed Vice Chair for Supervision, Michael Barr, delivered a speech at the Economics of Payments XII Conference discussing the Fed’s place in the payments system and highlighting its role as a bank supervisor and operator of key payment infrastructure. Emphasizing the Fed’s introduction of its FedNow instant payment service (covered by InfoBytes here), which was designed to enable secure instant payments in response to the increasing demand for secure and convenient payment options, Barr encouraged banks to build upon the new payment infrastructure. He also noted that ongoing experimentation with new payment technologies, such as stablecoins, creates a need for regulation, particularly where an asset is “pegged to government-issued currencies.”
Regarding central bank digital currencies (CBDCs), the Fed is engaged in research and in discussions with various stakeholders; however, it has not decided on whether to issue a CBDC. The Vice Chair stressed that any move in this direction would require “clear support” from the Executive Branch and authorization from Congress.
Barr emphasized the Fed’s commitment to working with the international community to improve cross-border payment systems as well as the need for research into both traditional and emerging payment methods, noting that innovation should “promote broad access and financial inclusion.” Finally, the remarks touched on the Fed’s proposed revisions to the interchange fee cap for debit card issuers, with a call for public input on the matter (covered by InfoBytes here).
Fed seeks comment on lowering the interchange fee for debit card issuers
On October 25, the Fed announced a proposed rule that would lower the maximum interchange fee that a debit card issuer with at least $10 billion in total consolidated assets can receive for a debit card transaction and would also establish a regular process for updating the maximum fee amount every other year going forward. Moreover, the Board approved the release of its latest biennial report which sets forth data collected from larger debit card issuers on interchange fees, issuer costs, and fraud related to debit card transactions.
Under the Dodd-Frank Act, the Fed is required to establish standards for assessing whether the amount of any interchange fee received by a debit card issuer is reasonable and proportional to the costs incurred by the issuer for the applicable transaction, which results in the Fed setting an interchange fee cap. The FRB developed the fee cap in 2011 using data provided by large debit card issuers with $10 billion or more in assets. But since that time, the Fed has found that certain costs incurred by such debit card issuers have declined dramatically, yet the interchange fee cap has remained the same. As such, the Fed (i) proposes to update the interchange fee cap based on the latest data reported to the Board by large debit card issuers, and (ii) proposes to update the fee cap every other year by linking the fee cap to data from the Fed’s biennial report of large debit card issuers.
The comment period will close 90 days after the proposal is published in the Federal Register.
Regulators release final principles for climate-related financial risk management
On October 25, the Fed, OCC, and FDIC issued final interagency guidance titled Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The principles are intended to help the largest institutions supervised by the Federal banking agencies, i.e., those with over $100 billion in assets, manage climate-related risk.
These climate-related risks include both physical and transition risks. Physical risks include “hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, etc.,” while transition risks “refer to stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes… [towards] a lower carbon economy.”
These climate-related risks affect the values of assets of liabilities and damage property, leading to a loss of income, defaults, and liquidity risks. The agencies created these principles to direct board of directors and managers make sound business practices with making progress toward mitigating climate-related financial risks.
CFPB Director Rohit Chopra, a member of the FDIC Board of Directors, shared remarks on the final principles, noting that climate change poses a dual challenge to protect infrastructure and fortify the financial system. He also stressed the need for regulatory guidance to convey clear and practical rules. FDIC Chairman Gruenberg also shared a statement on the final principles, highlighting the FDIC’s focus on the financial aspects of climate change, clarifying its role in managing risks rather than setting climate policy and encouraging cooperation among federal banking agencies to ensure consistency in addressing climate-related financial risks.
FDIC issues NPR to revise Federal Deposit Insurance Act regulations on Section 19
On October 24, FDIC announced a proposed rule to implement the Fair Hiring in Banking Act (FHB Act). The proposed rule amends 2 C.F.R. part 303, subpart L, and part 308, subpart M. The Federal Deposit Insurance Act (FDI Act) prohibits a person from participating in the affairs of an FDIC-insured institution if he or she has been convicted of an offense involving dishonesty, breach of trust, or money laundering, or has entered a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC, among other provisions. The proposed rule would incorporate several statutory changes to the FDI Act, such as:
- Excluding certain offenses from the scope of the FHB Act based on the amount of time that has passed since the offense occurred or since the individual was released from incarceration;
- Clarifying that the FHB Act does not apply to the following offenses, if one year or more has passed since the applicable conviction or program entry: using fake identification, shoplifting, trespassing, fare evasion, and driving with an expired license or tag;
- Excluding certain offenses from the definition of “criminal offenses involving dishonesty,” including “an offense involving the possession of controlled substances”;
- Excluding certain convictions from the scope of the FHB Act that have been expunged, sealed, or dismissed. While existing FDIC regulations already exclude most of those offenses, the proposed rule would modestly broaden the statutory language concerning such offenses to harmonize the FDIC’s current regulations concerning expunged and sealed records with the statutory language; and
- Prescribing standards for the FDIC’s review of applications submitted under the FHB Act.
The proposed rule also provides interpretive language that addresses, among other topics, when an offense “occurs” under the FHB Act, whether otherwise-covered offenses that occurred in foreign jurisdictions are covered by the FDI Act, and offenses that involve controlled substances.
Comments will be accepted for 60 days after publication in the Federal Register.
Agencies extend comment period on proposed rules to strengthen large bank capital requirements
On October 20, the Fed issued a joint press release with the FDIC and the OCC announcing the extension of the comment period on proposed rules to expand large bank capital requirements. Earlier this year, the agencies announced the proposed rule which would implement the final components of the Basel III Agreement. The components would revise capital requirements for large banking organizations, among other things. (Covered by InfoBytes here.) Adding an additional six weeks (from the original 120-day comment period set to expire on November 30), the new comment period deadline is by January 16, 2024.
FDIC’s crypto risk oversight criticized in OIG report
On October 18, the FDIC Office of Inspector General released a report on the FDIC’s strategies addressing the risks posed by crypto assets. According to the report, the FDIC has started to develop and implement strategies that address crypto risks but has not assessed the significance and potential impact of the risks. Additionally, although the FDIC requested that financial institutions provide information pertaining to their crypto‑related activities, its process for providing supervisory feedback is unclear. Between March 2022 and May 2023, the FDIC sent pause letters to several institutions related to their crypto activities, but it had not provided supervisory feedback to all of those institutions, it did not have an expected timeline for reviewing information and responding to institutions, and its procedures did not describe what constitutes the end of the review process for supervised institutions that received a pause letter.
The OIG report recommends that the FDIC set a timeframe for assessing risks pertaining to related activities and update and clarify the supervisory feedback process related to its review of supervised institutions’ crypto-related activities. The FDIC agreed with both recommendations and plans to complete corrective actions by January 30, 2024.
EBA report recommends environmental and social risk enhancements for financial sector
On October 12, the European Banking Authority (EBA) announced the publication of a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework, which sets capital requirements, noting that environmental and social risks are “changing the risk picture for the financial sector” and are expected to be more prominent over time. The report puts forward recommendations for actions over the next three years as part of the revised capital requirements regulations. Specifically, the EBA is proposing to: (i) include environmental risks as part of stress testing programs; (ii) encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies; (iii) encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral; (iv) require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and (v) develop environment-related concentration risk metrics as part of supervisory reporting. With respect to revisions to the Pillar 1 framework, the report proposes: (i) the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework; (ii) changes to the role that transition plans could play in the future; (iii) reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardized approach for credit risk to better reflect environmental risk elements; and (iv) the introduction of environment-related concentration risk metrics under the Pillar 1 framework.
Fed governor speaks on responsible innovation in money and payments
On October 17, Federal Reserve Board Governor Michelle Bowman provided remarks on innovation in money and payments, including crypto assets, central bank digital currency (CBDC), and the development of instant payments, in which she laid out her vision for “responsible innovation,” which recognizes the important role of private-sector innovation and leverages the U.S. banking system supported by clear prudential supervision and regulation. With respect to CBDC, Bowman said that she has yet to see a compelling argument that CBDC could address frictions within the payment system, promote financial inclusion, or provide the public with access to safe central bank money any more effectively or efficiently than alternatives. She explained that, given that the U.S. has a safe and well-functioning banking system, the potential uses of a U.S. CBDC remain unclear and, at the same time, could introduce significant risks and tradeoffs. Bowman also expressed skepticism over stablecoins, stating that in practice they have been less secure, less stable, and less regulated than traditional forms of money. Finally, Bowman discussed technological innovations in wholesale payments, which are large-value, interbank transactions. Bowman said that the Fed is researching emerging technologies that could enable or be supported by future Fed-operated payment infrastructures, including depository institutions transacting with “tokenized” forms of digital central bank money. Bowman noted that banks and other eligible institutions already hold central bank money as digital balances at the Fed. She also stressed that wholesale payment infrastructures operated by the Fed “underpin domestic and international financial activities” by serving as a “foundation” for payments and the broader financial system. Because these wholesale systems function “safely and efficiently” today, it is necessary to investigate and understand the potential opportunities, risks, and tradeoffs for wholesale payment innovation to support a safe and efficient U.S. payment system.
Find continuing InfoBytes coverage on CBDCs here.