Recent changes to the German regulatory situation for debt funds

Pursuant to recent legislative changes, certain investment funds are now entitled under certain conditions to originate or restructure loans in Germany without the need to obtain a banking licence for lending. Due to the legislative changes, it is now easier to originate or restructure third party loans for certain types of German alternative investment funds (AIFs), and various types of German funds now have broad possibilities to grant shareholder loans or to acquire loans. For EU AIFs, it is now generally easier to originate or restructure loans in Germany. Even foreign (i.e. non-EU) funds may now grant or restructure loans in Germany, but subject to much stricter requirements than those for EU AIFs. This Reed Smith alert sets out an overview of the changes and the updated situation.

To read the entire Reed Smith Client Alert, please click here.

New decision on bank’s duties regarding interest rate swaps

The 11th senate of the German Federal Supreme Court again had to deal with the duties of a bank recommending interest rate swap agreements. In this context, the German Federal Supreme Court re-affirmed on 22 March 2016 – XI ZR 425/14 – its position that a bank dealing with a customer interested in the conclusion of an interest rate swap has a core duty to advise this customer. In this context, the bank also has to disclose to its customer a negative market value of the interest rate swap at the time of the conclusion of such swap.

To continue reading about this decision, please click here.

2015 FinCEN Enforcement Trends

To read a review of FinCEN’s enforcement efforts in 2015 and 2014 , which reveal a marked trend away from its longstanding focus on depository institutions and toward otherwise unregulated financial institutions, as well as an increased focus on pursuing penalties against individuals, view the Reed Smith client alert here.

Fourth Circuit Rules FDCPA Does Not Apply to Consumer Finance Company Collecting Debt on Its Own Behalf, Even if It Acquired the Debt After Default

Reed Smith secured a precedential victory in the Fourth Circuit for client Santander Consumer USA Inc., holding that the Fair Debt Collection Practices Act (“FDCPA”) does not apply to a consumer finance company trying to collect debts owed to itself. In Henson v. Santander Consumer USA Inc., No. 15-01187, the court held that such a company is not a “debt collector” subject to the FDCPA when the company purchased the debts in a portfolio of consumer debts—even if some of the debts were in default when acquired.

Because the FDCPA imposes numerous restrictions and requirements on debt-collection activities, it is crucial for consumer finance companies to know when it applies to them. But whether the FDCPA applies to particular debt-collection efforts depends on whether the company is a “debt collector” or a “creditor” under the Act’s notoriously complex definitional provisions.

In Henson, the plaintiffs alleged that they and a class of other borrowers obtained loans from CitiFinancial Auto, and that Santander violated the FDCPA by attempting to collect on those loans after they had defaulted on them. The plaintiffs argued that Santander is a debt collector under the FDCPA, not a creditor, because the loans were in default when Santander acquired them.  On appeal, plaintiffs were supported by amicus briefs filed jointly by the AARP, the National Consumer Law Center; the National Association of Consumer Advocates; Civil Justice, Inc.; Public Justice Center, Inc.; Maryland Consumer Rights Coalition, Inc.; and the Maryland attorney general.

Santander, represented by Travis Sabalewski and Robert Luck of Reed Smith’s Financial Industries Group, first persuaded the Maryland District Court to dismiss the claim. On appeal, Kim Watterson and Richard Heppner of the Appellate Group persuaded the Fourth Circuit three-judge panel to affirm in a precedential opinion by Judge Paul V. Niemeyer. The Fourth Circuit adopted Santander’s view that, despite the FDCPA’s “somewhat complex and technical regulation of debt collector practices,” the statute’s plain language and purpose showed that “it generally does not regulate creditors when they collect debt on their own account and that, on the facts alleged by the plaintiffs, Santander became a creditor when it purchased the loans before engaging in the challenged practices.” The court also rejected the plaintiffs’ and their amici’s reliance on various definitional exceptions to subject Santander to FDCPA regulation.

The Fourth Circuit’s ruling—on a question of first impression in the Circuit—provides consumer finance companies needed clarity on the scope of FDCPA liability.

German Banking Market is on the Move

The German banking market is on the move. This presents opportunities for foreign investors who would like to enter the German financial market. However, in order to acquire an interest in a German financial institution, i.e. credit or financial services institution, an investor has to comply with a couple of specific regulatory requirements.

To continue reading, please click here to view the entire Reed Smith Client Alert.

OCC Announces Shift in Enforcement Policy: Increased Focus on Internal Risk Management and Personal Liability of Bankers

The Office of the Comptroller of the Currency (“OCC”), the primary federal regulator for most large banks, recently issued a new policy on agency enforcement actions seeking civil money penalties (“CMPs”) against institutions and individuals.  There are several key developments that will directly affect institutions and the directors, officers, employees, major shareholders, and vendors associated with them.  These developments include a shift in the weight that the OCC will accord certain aggravating and mitigating factors when determining whether to bring a CMP action and how much of a penalty the OCC will seek, increased expectations for maintaining a robust internal compliance program, and a possible increase in CMP actions brought against specific insiders associated with an institution.

Read the full alert.


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.

To read more about the action, view our Technology Law Dispatch post.

The FCA’s Project Innovate: A road to FinTech-success or regulatory cul-de-sac?

Jacqui Hatfield and Melanie Shone have recently published an article in Finance Monthly, examining the performance of the FCA’s Project Innovate.

The authors caution that “any new rules, specific to a particular technology, may quickly become obsolete as the pace of development in the FinTech space outstrips the speed of regulatory response.  It is therefore essential that regulatory rules are as technologically neutral and forward thinking as possible – and that these are combined with proactive industry engagement and appropriate practical guidance from the FCA to provide much-needed regulatory certainty and clarity to the industry”.

The authors foresee a bumpy road ahead as industry participant and regulators navigate the potential conflicts between regulatory aims and disruptive FinTech innovation.

If you would like to discuss any of the topics raised further, please contact Jacqui Hatfield on 0207 116 2971  A full copy of the article for Finance Monthly can be accessed on page 20 here.

New “Senior Managers Regime” to be introduced for all financial services firms, including the fund management sector

The Government has confirmed that it will be pushing forward with extending the Senior Managers and Certification Regime to all financial services firms (including investment firms and fund managers), following the Fair and Effective Markets Review (FEMR) report’s recommendation (and Mark Carney’s Mansion House speech indication) of the extension of the SMR to fixed income, commodity and currency markets.  The new regime (for insurers, the Senior Insurance Managers and Certification Regime, or SIMR) will come into force for banking and insurance sector firms from March 2016, leaving the discredited Approved Persons Regime (APR) in place for other financial sector firms.

The Government intends that implementation of the newly extended regime should come into operation during 2018, so there is much still to be finalised as the legislative and consultation process unfolds in the coming months. A key area will be the detail in the Government’s plans for how the ‘principle of proportionality’ will operate to take into account the diversity of firms in the sector – this will be a key area of interest for smaller financial services firms.  As the shape of any universal senior managers regime is likely to follow the SMR and SIMR very closely, we would expect to also see similar grandfathering provisions to ease the transition.  Continue Reading

Addressing Attestations

Attestations are part of the FCA supervisory toolkit used to ensure accountability from senior management in all regulated firms. They are a means by which the FCA can gain personal commitment from an approved person that specific action has been taken or will be taken, often without requiring ongoing regulatory involvement.  We have seen attestations commonly used in conjunction with other FCA supervisory powers, such as following the conclusion of a Skilled Person Review under Section 166 Financial Services and Markets Act 2000.

The most appropriate person (or persons) to make an attestation will very much depend on the situation of the firm, the objectives of the attestation and the particular factual circumstances surrounding the FCA’s request, but we would generally expect most attestations that undertake to take future actions to be made by the most senior individual(s) in the firm who has/have both the necessary authority and responsibility to initiate the changes required.  However, we have seen these being directed towards compliance officers for whom it may not be appropriate to take on the personal liability attestations bring without at least the CEO or a Board member attesting alongside them. Continue Reading