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On June 25, the House Financial Services Committee’s Task Force on Financial Technology held its first-ever hearing, entitled “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation.” As previously covered by InfoBytes, the Committee created the task force to explore the use of alternative data in loan underwriting, payments, big data, and data privacy challenges. The hearing’s witness panel consisted of high-ranking innovation officials across various agencies and associations, including the CFPB, OCC, SEC, CSBS, and the U.K.’s Financial Conduct Authority. Among other things, the hearing discussed whether digital currency is considered a security, the OCC’s special purpose national bank charter, and the U.K.’s regulatory sandbox approach.
SEC representative, Valerie Szczepanik, stated that she believes the SEC has been “quite clear” with regard to initial coin offerings, noting that “[e]ach digital asset is its own animal. It has to be examined on its facts and circumstances to determine what in fact it is. It could be a security, it could be a commodity, it could be something else. So we stand ready to provide kind of guidance to folks if they want to come and talk to us. We encourage them to come talk to us before they do anything so they can get the benefit of our guidance.”
While much of the OCC special purpose bank charter discussion focused on a social media’s plan to launch its own virtual currency, CSBS representative, Charles Clark, emphasized that “[s]tate regulators oppose the special purpose charter because it lacks statutory authority” and that it should be up to Congress to decide whether the OCC can regulate non-bank entities. Clark noted that a federal system would create an unlevel playing field compared to a state system where “a small company can enter the system, scale up, and be competitive with an innovative idea.”
Lastly, the FCA representative, Christopher Woolard, emphasized that fintech firms participating in the country’s sandbox program are “fully regulated” and probably the U.K.’s “most heavily supervised,” noting that the FCA believes “sandbox firms have to work in the real world from day one.” Additionally, Woolard asserted that the sandbox program is making a difference in the market stating that of their 110 tests, 80 percent of the firms that enter the program go on to fully operate in the market. He concluded asserting, “we believe that around millions of consumers have  access to new products  geared around better value or greater convenience.”
On April 9, U.S. and U.K regulators announced that a London-based global financial institution would pay $1.1 billion to settle allegations by the DOJ, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the Federal Reserve Board, the New York Department of Financial Services (NYDFS), the Manhattan District Attorney, and the U.K.’s Financial Conduct Authority (FCA) for allegedly violating multiple sanctions programs, including those related to Burma, Cuba, Iran, Sudan, and Syria. According to the OFAC announcement, from June 2009 until May 2014, the institution processed thousands of transactions involving persons or countries subject to sanctions programs administered by OFAC, but the majority of the actions at issue concern Iran-related accounts maintained by the institution’s Dubai branches. OFAC alleged the Dubai branches processed transactions through the institution’s New York branches on behalf of customers that were physically located or ordinarily resident in Iran.
According to the $639 million settlement agreement, OFAC noted, among other things, that the institution “acted with reckless disregard and failed to exercise a minimal degree of caution or care” with respect to the actions at issue. Moreover, OFAC alleged that the institution had actual knowledge or reason to know its compliance program was “inadequate to manage the [the institution]’s risk.” OFAC considered numerous mitigating factors, including that the institution’s substantial cooperation throughout the investigation and its undertaking of remedial efforts to avoid similar violations from occurring in the future.
The $639 million penalty will be deemed satisfied by the institution’s payments to other U.S. regulators, which includes, $240 million forfeiture and $480 million fine to the DOJ, $164 million fine to the Federal Reserve, and $180 million fine to the NYDFS. The institution also settled with the FCA for $133 million. The settlement illustrates the risks to foreign financial institutions associated with compliance lapses when processing transactions through the U.S. financial system.
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.
On April 3, Martin Wheatley, Chief Executive of the UK Financial Conduct Authority (FCA), which took over responsibility for overseeing consumer credit markets in the UK on April 1, 2014, identified the FCA’s most “immediate priority” as ensuring “providers of credit, as well as satellite services like credit broking, debt management and debt advice, have sustainable and well-controlled business models, supported by a culture that is based on ‘doing the right thing’ for customers.” He explained that the FCA wants to expand financial service providers’ focus on compliance with specific rules to include “wider FCA expectations of good conduct.” Referencing a paper the FCA published on April 1, the day it began overseeing consumer credit markets, Mr. Wheatley stated that consumer credit providers need to consider how they engage with consumers in vulnerable circumstances. On this issue, the FCA also announced a “competition review” of the UK credit card market to determine, among other things, “how the industry worked with those people who were in difficult financial situations already.”
On March 4, the UK FCA released the results of its most recent review of sales incentives at retail financial firms. The FCA’s review revealed that retail banks have made progress in changing their financial incentive structures in response to the FCA’s supervisory focus on the issue starting in September 2012, which led to new guidance issued in January 2013. The FCA’s initial focus on the issue derived from its concerns about incentive structures that, among other things, allegedly fueled the sale of payment protection plans and other add-on products. Despite the broad progress, the FCA reports that roughly one in 10 firms with sales teams had higher-risk incentive scheme features where it appeared they were not managing the risk properly at the time of the FCA’s assessment. It believes firms should concentrate on, among other things (i) checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk; (ii) better monitoring behavior in face-to-face sales conversations; and (iii) managing risks in discretionary incentive schemes and balanced scorecards, including the risk that discretion could be misused. The FCA states that given the progress made, it is not proposing any rule changes at this time, but it intends to keep financial incentives on its agenda for 2014.
On February 28, the UK Financial Conduct Authority (FCA) announced final rules for consumer credit providers, including new protections for consumers in credit transactions. The FCA states that the most drastic changes relate to payday lending and debt management. For example, with regard to “high-cost short-term credit,” the new rules will (i) limit to two the number of loan roll-overs; (ii) restrict to two the number of times a firm can seek repayment using a continuous payment authority; and (iii) require creditors to provide a risk warning. Among other things, the new rules also establish prudential standards and conduct protocols for debt management companies, peer-to-peer lending platforms, and debt advice companies. The policy statement also describes the FCA’s risk-based and proactive supervisory approach, which the FCA states will subject firms engaged in “higher risk business” that “pose a potentially greater risk to consumers” to an “intense and hands on supervisory experience” and will allow the FCA to levy "swift penalties” on violators. The new rules take effect April 1, 2014. The FCA plans next to propose a cap on the cost of high-cost, short-term credit.
On October 3, the U.K. Financial Conduct Authority (FCA) proposed a framework for its regulation of consumer credit when those authorities transfer to the FCA from the Office of Fair Trading on April 1, 2014. As part of the U.K.’s ongoing regulatory reform and restructuring, after that date the FCA will supervise more than 50,000 firms who have existing credit licenses. The FCA proposes, among other things, (i) requiring lenders to conduct affordability checks on borrowers, (ii) requiring clear, fair and not misleading advertisements, and (iii) banning misleading advertisements. The regime would include additional new rules for payday lenders, which would: (i) restrict loan roll-overs to a maximum of two, (ii) require lenders to provide borrowers who roll-over loans with information about debt advice resources, (iii) restrict to two the number of times an automatic payment deduction authority can be used, and (iv) restrict the content of payday lending advertisements. The Consultation Paper is open for comment through December 3, 2013. The FCA plans to publish the final rules and guidance in February 2014.
- Amanda R. Lawrence to discuss "Navigating the challenges of the latest data protection regulations and proven protocols for breach prevention and response" at the ACI National Forum on Consumer Finance Class Actions and Government Enforcement
- Tim Lange to discuss "Ease your pain at the state level: Recommendations for navigating the licensing issues in the states" at the Online Lenders Alliance Compliance University
- Amanda R. Lawrence, Aaron C. Mahler, and Jonice Gray Tucker to discuss "Expanded role for the FTC ahead: Implications for bank and nonbank financial institutions" at an American Bar Association Banking Law Committee Webinar
- Buckley Webcast: Flirting with alternatives — Opportunities and challenges created by alternative data, modeling, and technology
- Daniel P. Stipano to discuss "Reporting requirements for credit unions: CTRs and SARs" at the National Association of Federally-Insured Credit Unions BSA Seminar
- Daniel P. Stipano and Moorari K. Shah to discuss "Vendor management: What is the NCUA looking for?" at the National Association of Federally-Insured Credit Unions BSA Seminar
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Summer Regulatory Compliance School
- Warren W. Traiger to discuss "CRA modernization" at the National Association of Industrial Bankers and the Utah Association of Financial Services Annual Convention
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
- Hank Asbill to discuss "Ethical guidance in conducting internal investigations – The intersection of Yates and Upjohn" at the American Bar Association Southeastern White Collar Crime Institute
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at the American Bar Association Business Law Section Annual Meeting
- Daniel P. Stipano to discuss "Navigating the conflicting federal and state laws for doing business with cannabis companies" at the American Bar Association Business Law Section Annual Meeting
- Tim Lange to discuss "Services and value" at the North American Collection Agency Regulatory Association Annual Conference
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Brandy A. Hood to discuss "How to ace your TRID exam" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Melissa Klimkiewicz to discuss "Navigating FHA rules and regs" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "The state’s role in fintech: Providing an industry framework for innovation" at Lend360
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference