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Financial Services Law Insights and Observations


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  • OCC Revises Guidance Regarding Consumer Protection Requirements to Overdraft Lines and Protection Services

    Consumer Finance

    As previously reported in our March 11 Special Alert Update, on March 6, 2015, the OCC issued its revised “Deposit-Related Credit” booklet (“DRC booklet”) of the Comptroller’s Handbook, which replaced the “Deposit-Related Consumer Credit” booklet issued on February 11, 2015 (previously covered in this Special Alert).  While the new booklet covers the same products – check credit (overdraft lines of credit, cash reserves, and special drafts), overdraft protection services, and deposit advances – the OCC made significant amendments to scale back the provisions of the prior version.  Specifically, the new DRC booklet no longer contains supervisory principles that could be read to require that banks provide substantive consumer protections that are not currently required by the applicable consumer protection regulations.   For example, the DRC booklet no longer requires that banks:

    • only enroll customers into an overdraft protection service if they have affirmatively requested that product;
    • ensure the ability to repay for all applicants enrolled in an overdraft protection service; and
    • ensure that any fees charged in connection with an overdraft protection service are reasonably related to the program’s costs and associated risks.

    In making these changes, the OCC requires supervisors to assess DRC products more in line with existing consumer protection laws.  The OCC states as much in OCC Bulletin 2015-17, which announced the DRC booklet.  There, the OCC acknowledges that the DRC booklet “is intended as a summary restatement of existing laws, regulations, and policies [and] ... [n]othing in this booklet should be interpreted as changing existing OCC policy.”

    OCC Overdraft Bank Compliance Regulation Z

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  • FDIC Orders Maryland-Based Bank to Improve Its BSA/AML Compliance Program

    Consumer Finance

    On December 24, a Maryland-based bank entered into an FDIC consent order involving alleged deficiencies in its BSA/AML compliance program. The consent order requires that the bank’s board of directors increase its oversight of the bank’s BSA compliance program. In addition, under the consent order, the bank must (i) appoint a qualified BSA officer and (ii) conduct a retrospective review of currency transaction reports beginning in May 2013 until the effective date of the consent order to determine whether transactions were properly identified and reported.

    FDIC Anti-Money Laundering Bank Secrecy Act Bank Compliance

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  • Fed Governor: "Tailor Regulations to the Institution"

    Consumer Finance

    On December 2, Fed Governor Brainard delivered remarks at the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) Outreach Meeting in California. Governor Brainard noted the significance of safety and soundness in the banking system, but noted that some Dodd-Frank regulations should target only larger institutions so that undue burdens are not placed on community banks: “Applying a one-size-fits-all approach to regulations may produce a small benefit at a disproportionately large compliance cost to smaller institutions.” The EGRPRA review, conducted every 10 years, provides an opportunity for federal financial regulators to consider whether current regulations are outdated, unnecessary, or unduly burdensome.

    Dodd-Frank Federal Reserve Bank Compliance

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  • Financial Conduct Authority Announces Fines Against Banks For Foreign Exchange Practices

    Federal Issues

    On November 12, the FCA announced that it was fining five banks for their foreign exchange practices. Specifically, ineffective controls at the banks allegedly allowed traders to strategize and manipulate exchange rates for their benefit. Additionally, confidential bank information was compromised in online chat rooms, including “the disclosure of information regarding customer order flows and proprietary Bank information, such as [foreign exchange] rate spreads.” The combined amount of civil money penalties against the banks is $1.7 billion.

    Bank Compliance Enforcement UK FCA Foreign Exchange Trading

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  • Eleventh Circuit Vacates Dismissal, Rules Bank Officers Subject To Negligence Claims Under Georgia Law

    Consumer Finance

    On October 24, based on the Georgia Supreme Court’s response to the federal appellate court’s certified questions, the United States Court of Appeals for the Eleventh Circuit issued a per curiam opinion overturning a district court’s order to dismiss a lawsuit under Georgia’s business judgment rule. In this case, the court addressed whether bank directors and officers of failed banking institutions could be held liable under the state’s law for claims of ordinary negligence and breach of fiduciary duty based on ordinary negligence. In light of the responses from the Georgia Supreme Court, the Eleventh Circuit noted, “a bank director or officer may violate the standard of care established by O.C.G.A. § 7–1–490, even where he acts in good faith, where, with respect to the process by which he makes decisions, he fails to exercise the diligence, care, and skill of ‘ordinarily prudent men [acting] under similar circumstances in like positions.’” The case was remanded back to the district court for further proceedings. FDIC v. Skow, No. 12-15878, WL 5394321 (11th Cir. Oct. 24, 2014)

    Bank Compliance

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  • New York's Highest Court Allows Banks, Customers To Shorten Period For Wrongly Paid Items

    Consumer Finance

    On May 8, the New York Court of Appeals held that in certain circumstances a bank and its customer may agree to shorten the statutory time period under the state’s Uniform Commercial Code within which a customer must notify its bank of an improperly paid item in order to recover the payment. Clemente Bros. Contracting Corp. v. Hafner-Milazzo, No. 64, 2014 WL 1806924 (N.Y. May 8, 2014). The court explained that New York's version of the UCC imposes strict liability on a bank that charges against its customer's account any "item" that is not "properly payable", but bars a customer's claim for recovery on a wrongfully paid item when the customer fails to report the irregularity within one year after the bank provides the statement and item, regardless of either party's failure to exercise reasonable care. In this case, the customer’s account agreement reduced the one-year reporting period to 14 days. The court held that the parties are permitted to vary the one-year period by agreement, and that the 14-day period is not manifestly unreasonable where the customer is a “corporate entity that either is financially sophisticated or has the resources to acquire professional guidance.” The court stressed that the same would not hold true where the customer is an unsophisticated small business or individual.

    Bank Compliance Retail Banking

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  • Eleventh Circuit Holds Custodian Bank Has No Duty To Police Securities Transactions By Customer's Investment Advisor

    Consumer Finance

    On April 14, the U.S. Court of Appeals for the Eleventh Circuit held that a custodian bank had no duty under New York or Florida law to identify or alert a customer to fraudulent transactions directed by the customer’s investment advisor. Lamm v. State Street Bank & Trust, No. 12-15061, 2014 WL 1410172 (11th Cir. Apr. 14, 2014). A bank customer sued his bank for breach of contract, breach of fiduciary duty, negligence, and several other common law claims, alleging the bank had a duty to notify him that the securities held by the bank were worthless. The court determined that, although the bank held the assets and could execute certain administrative transactions without prior authorization, transactions beyond these administrative roles were carried out at the direction of the customer’s investment advisor. Accordingly the bank had no responsibility for supervising investments and assumed no liability for losses except those it caused through negligence or willful misconduct. The court held that the customer’s breach of contract and negligence claims failed because (i) the custody agreement provided the bank no decisionmaking role in investments; (ii) the bank had contractual authority to rely on the investment advisor’s instructions; and (iii) the customer failed to demonstrate that the bank had a duty to ensure the investment instruments were valid or to verify their market value. The court further held with regard to the customer’s other claims that (i) the fact that certain securities had facial defects does not raise a plausible inference that the bank knew of the investment advisor’s wrongdoing, and cannot support a claim for aiding and abetting fraud; (ii) the custody terms established an arm’s length agreement with limited obligations and did not establish special circumstances on which a fiduciary duty claim can be made; and (iii) the customer’s negligent misrepresentation claim failed because the customer did not establish that the bank intended to induce him to rely on its alleged representations as to the validity of his securities.

    Bank Compliance Investment Adviser

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  • Comptroller Curry Addresses Senior Management's AML Compliance Responsibilities, Criticizes "De-Risking"

    Consumer Finance

    On March 17, Comptroller of the Currency Thomas Curry reaffirmed his agency’s views with regard to BSA/AML compliance and the responsibilities of senior bank managers and boards of directors. Mr. Curry asserted that BSA infractions “can almost always be traced back to decisions and actions of the institution’s Board and senior management” and that the deficiencies underlying those infractions tend to involve failures in four areas: (i) the culture of compliance at the organization; (ii) the resources committed to BSA compliance; (iii) the strength of information technology and monitoring process; and (iv) the quality of risk management. Mr. Curry reported a recent positive trend, particularly at OCC-regulated large banks, which have increased spending and added BSA/AML compliance staff. He stated that such actions are one aspect of banks’ efforts to align “good compliance practices and the bank’s system of compensation and incentives.” The Comptroller criticized a separate trend of “de-risking”, in which banks avoid or end relationships with types of businesses deemed too risky. He warned that any business can be used for illicit purposes and “de-risking” is not a shortcut to circumvent a bank’s obligation to evaluate risk on an individual basis. He encouraged banks not to avoid high-risk businesses, but rather to apply stronger risk management and controls as necessary.

    OCC Anti-Money Laundering Bank Secrecy Act Bank Compliance Directors & Officers

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  • Federal Reserve Plans Regular Reporting On Bank Applications, Outlines Common Issues Resulting In Application Withdrawals

    Consumer Finance

    On  February 24, the Federal Reserve Board announced in SR 14-2 that it will start publishing a semi-annual report to provide certain information on bank applications and notices filed with the Federal Reserve. The Board stated that the report will include statistics on the length of time taken to process various applications and notices and the overall volume of approvals, denials, and withdrawals. The report also will provide the primary reasons for withdrawals. The first report will be released in the second half of 2014 and will include filings acted on from January through June 2014. The letter also describes common issues identified by the Federal Reserve that have led to recent withdrawal of applications, including (i) less-than-satisfactory supervisory rating(s) for safety and soundness, consumer compliance, or CRA; (ii) inadequate compliance with the Bank Secrecy Act; and (iii) concerns regarding the financial condition or management of the proposed organization.

    Federal Reserve Bank Compliance Bank Supervision

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  • FinCEN Director Reinforces Enforcement And Compliance Themes, Highlights Risks For Securities Firms

    Financial Crimes

    On January 30, in remarks to SIFMA’s AML and Financial Crimes Conference, FinCEN Director Jennifer Shasky Calvery stressed the importance of establishing a “culture of compliance” at financial institutions to support effective AML safeguards. The Director’s comments reinforce similar remarks made in recent months by both the Deputy U.S. Attorney General and Comptroller Curry. And like Comptroller Curry, Ms. Shasky Calvery highlighted the need for better information sharing not only within institutions but between institutions. FinCEN agrees with industry feedback that the agency needs to improve its own ability to share information. Also part of a broader theme among enforcement authorities, the Director explained that financial institutions should take responsibility when their actions violate the BSA, not only by admitting to the facts alleged by FinCEN but also by acknowledging a violation of the law. She highlighted specific risks in the securities sector including those related to the use of cash, and explained that securities firms that provide bank-like services need to consider the vulnerabilities associated with engaging in such services and must ensure that their compliance programs are commensurate with those risks.

    Anti-Money Laundering FinCEN Bank Secrecy Act Compliance Bank Compliance Enforcement

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