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

What Has the CFPB Said About That?

As an early “holiday gift,” to help you more easily search for a particular piece of guidance from the CFPB, we’ve put together two CFPB guidance documents for your review. The first is a compilation of all nine issues of the CFPB’s Supervisory Highlights, from 2012 to 2015. The second is a compilation of all the CFPB’s Bulletins, as of December 1, 2015.

CFPB Supervisory Highlights 2012-2015     CFPB Bulletins 2011-2015

We hope these are useful to you and your team.


Fannie Mae’s Credit-Risk Transfer Initiatives Approach the Half-Trillion-Dollar-Mark, Reducing Taxpayers’ Exposure – But Some Are Recommending More Should Be Done

While the FHFA’s conservatorships of Fannie Mae and Freddie Mac are unlikely to end before 2017, the Enterprises continue to transfer more credit risk from their single-family residential mortgages to private insurers. Both GSEs have exceeded their credit-risk transfer goals for calendar year 2015, largely because of Fannie Mae’s CAS series and Freddie Mac’s Structured Agency Credit Risk (STACR) series. Fannie Mae has transferred credit risk on $205 billion in single-family mortgages as of October 2015 (the goal was $150 billion), and Freddie Mac has transferred credit risk on $126 billion in single-family mortgages for that same period (the goal was $120 billion).

Credit-risk transfer is now a regular part of the Enterprises’ business, as cited in FHFA’s Performance and Accountability Report for FY 2015. In all credit-risk transfers, the Enterprises and FHFA have been strategic about which loans to target. Instead of using a random sample of Enterprise loans, the transactions focus on new loan purchases with the greatest credit risk. The targeted loans include new acquisitions of 30-year fixed-rate mortgages that have loan-to-value ratios exceeding 60 percent, excluding HARP (Home Affordable Refinance Program) refinances. The Enterprises are currently transferring significant credit risk on approximately 90 percent of these targeted loans, the mainstay of their single-family purchases. This approach has made the transactions easier to scale-up and more economical, benefitting the Enterprises and taxpayers.

FHFA said that going forward it will set specific goals in the annual conservatorship scorecard and work closely with staff members at Fannie Mae and Freddie Mac to help the GSEs develop and evaluate their credit-risk transfer structures. FHFA is encouraging the GSEs to continue engaging in large volumes of meaningful credit-risk transfer. More than 150 investors have participated in the STACR and CAS programs; any given transaction will typically feature anywhere from 50 to 70 investors, according to FHFA. Asset managers make up the largest share of participating investors with 53 percent; hedge funds have the next largest share with 31 percent.

However, some in the industry, like the Mortgage Bankers Association (“MBA”), are suggesting that the GSEs’ use of multiple forms of up-front risk sharing be piloted, including deeper cover mortgage insurance, lender recourse, and structured finance. Moreover, the thinking is that multiple forms of up-front risk sharing should be approached in a manner that maximizes the opportunity for the market broadly, and should not advantage certain lenders relative to others. That is, approved sellers to the enterprises of all sizes and business models should be eligible to participate in such a program, and would be in keeping with FHFA’s policy of leveling the playing field between larger and smaller lenders.

Up-front transactions are defined as those that de-risk loans before they are acquired by the GSEs, as opposed to back-end CRTs that require the Enterprises to warehouse risk for a period of time, making them subject to swings in credit spreads, and having them retain substantial risk for the life of the loans. Many believe this up-front transaction approach will further reduce taxpayer risk, maintain a liquid and dynamic market, and help to build toward the new system by increasing the amount of private capital in front of the Enterprises and their federal backstop. Additionally, the MBA has raised concerns about retained risk practices involving mortgage insurance by the GSEs.

Notwithstanding the success of the Enterprises’ credit-risk transfer programs in their first three years, much is yet to be determined.

Because the programs have not been implemented through an entire housing price cycle, it is too soon to say whether the credit-risk transfer transactions currently ongoing will make economic sense in all stages of the cycle. Specifically, we cannot know the extent to which investors will continue to participate through a housing downturn. Additionally, the investor base and pricing for these transactions could be affected by a higher interest rate environment in which other fixed-income securities may be more attractive alternatives. Given this uncertainty, some within the industry, like the National Mortgage Banker’s Association and the Mortgage Insurance Industry, are recommending in a recent letter that more should be done, such as incorporating additional explicit, up-front, risk-sharing targets.

Conclusion: While there may be many benefits to pursuing “multiple forms” of up-front risk sharing, it should only be “considered” in terms of conversation – as it is too early to immediately move forward with that concept. Rather, the best course is to see whether investors will continue to participate in the current “up-front” risk-sharing program through the housing recovery cycle: if the current credit-risk transfer transactions program does not continue to yield very positive returns for taxpayers, then the GSE’s should consider the multi-risk sharing concept.

CFPB Releases Compliance Bulletin about Obtaining Authorizations for Preauthorized Electronic Fund Transfers

The Consumer Financial Protection Bureau (the “CFPB”) warned financial companies in a compliance Bulletin Monday that they must have proper authorization before automatically debiting funds from customers’ accounts. (CFPB Compliance Bulletin 2015-06, November 23, 2015.)

The Electronic Fund Transfer Act and its implementing rule, Regulation E, require that companies obtain consumer authorization for electronic fund transfers, or debits, from consumers’ accounts. The bulletin was partly meant to remind merchants and financial institutions that they must “clearly describe” the terms of an automatic withdrawal and get pre-authorization from the consumer before deducting payments. The agency’s warning follows an administrative proceeding that the CFPB filed on November 18, 2015 against an online payday lender, Integrity Advance, partly on grounds that Integrity allegedly continued to automatically deduct funds from consumers’ bank accounts after they cancelled authorizations for such withdrawals.

The CFPB said in its press release accompanying the bulletin that its supervisory process found that “one or more companies” did not provide the consumer with “critical information” about automatic debits in its disclosures, such as the amount and timing of the payments.

The bulletin provides further clarification on when companies should send disclosures and that they can get a consumer’s consent either in writing or by phone if the E-Sign Act requirements for electronic records and signatures are met.  Regulation E may be satisfied if a consumer authorizes preauthorized debits by entering a code into their telephone keypad or if the company records and retains the consumer’s oral authorization; provided in both cases that the consumer intends to sign the record as required by the E-Sign Act. Companies must keep “clear records” on what the consumer authorized, and they must provide the consumer – in paper form or electronically – a copy of the terms, including the amounts of the debits, the recurring nature of the debits, and the timing. When practical, the CFPB encourages companies to provide the copy of the authorization terms prior to initiating the first automatic withdrawal.

FTC, CFPB, and States Collaborate to Clamp Down on Illegal Debt Collection

The Federal Trade Commission last week announced an unprecedented coordinated federal-state enforcement effort targeting deceptive and abusive debt collection. This sweeping initiative, termed “Operation Collection Protection,” coordinates federal, state, and local actions under the FTC, the CFPB, 47 state attorneys general, and other enforcement officers and agencies.

As the top source of complaints to the FTC and the Consumer Financial Protection Bureau, illegal debt collection practices have long been in the agencies’ crosshairs. “Operation Collection Protection” began with 30 new coordinated law enforcement actions targeting debt collectors using illegal methods such as harassing phone calls and false threats of litigation, arrest, and wage garnishment. With the involvement of state attorneys general and variations on state laws, banks and other creditors should have the new initiative on their radars as well.

Although the FTC does not have jurisdiction over banks, they should pay close attention to the initiative because of the involvement of the CFPB and state attorneys general, and variations on state laws under which attorneys general may investigate banks and other financial institutions. Continue Reading

CFPB Reports on Access to Mobile Financial Services

The Consumer Financial Protection Bureau (“CFPB”) this week shed new light on the growing mobile financial services sector, publishing a report compiling responses to its 2014 request for information on these services.

The CFPB’s Office of Financial Empowerment issued a Request for Information (“RFI”) on June 11, 2014, regarding mobile financial services. The RFI’s stated purpose was to help the CFPB “understand better the potential for mobile financial services to help underserved consumers – including low-income, unbanked, underbanked and economically vulnerable consumers – access financial services.” Thus, the focus of this week’s report is on the challenges and opportunities of using mobile financial services to aid that population.

The RFI did not include “point of sale” payments – a technology used in mobile payment systems such as Android Pay and Apple Pay – except insofar as such systems are marketed or used by underserved customers.

The new CFPB report, issued Nov. 4, found that mobile financial services present a mixed bag of benefits and risks to consumers. The report cited comments that “mobile financial services is not a panacea or a silver bullet” for customers facing “fundamental financial issues.” The report pointed to a “general consensus . . . that for mobile financial services to effectively reach underserved consumers, the mobile channel must be paired with consultative or assistance services, at least in the short-term.” Additionally, the report noted emerging security and privacy issues arising from mobile financial services, and mentioned some commenters’ call for new regulations on data privacy issues.

In defining mobile financial services, the CFPB referred in its Nov. 4 report to commenters’ statements that mobile financial services are not “discrete” banking services and products per se, but a “channel” by which such services and products may be accessed. “Both consumer and some industry groups,” the report stated, “cautioned that using the mobile channel should not be viewed as a replacement for accessing products and services via other, more traditional channels.” By suggesting that mobile financial services are derived from more traditional services, the report possibly indicates that the CFPB will take a more “traditional” approach to regulating mobile financial services. Continue Reading

Hastert Reaches Plea Deal in Anti-Money Laundering Case – Guilty Plea Expected

As I reported in a June 2, 2015 client alert, on May 28, 2015, Dennis Hastert, former Speaker of the U.S. House of Representatives, was indicted by a federal grand jury in the Northern District of Illinois. Mr. Hastert, a former high school teacher and football coach, was charged with making a “materially false, fictitious, or fraudulent statement or representation” to the FBI in violation of 18 U.S.C. section 1001(a)(2), and with structuring financial transactions “knowingly and for the purpose of evading the reporting requirements” of federal AML regulations issued by the Financial Crimes Enforcement Network (“FinCEN”), in violation of 31 U.S.C. section 5324(a)(3).

My analysis of Mr. Hastert’s indictment was also covered by on June 9, 2015 – Ex-Speaker Hastert to Give First Answer to Hush-Money Charges. In that article, I commented that “Hastert may ultimately negotiate a plea deal under which he might serve little if any prison time because of his long record of public service.” It turns out that a plea deal appears to have been reached.

This morning, the Chicago Tribune reported that Mr. Hastert “plans to plead guilty to an indictment that alleges that he agreed to make $3.5 million in hush money payments to cover up wrongdoing from years ago.” See “Dennis Hastert reaches plea deal, to admit wrongdoing,” Chicago Tribune (Oct. 15, 2015), available at According to the Tribune, Mr. Hastert has been ordered to appear in court on October 28 to enter the guilty plea. The plea agreement itself is expected to be submitted to the court on Monday, October 19.

We will continue to follow this story closely and report on the substance of the plea agreement, and the impact of this action on future AML enforcement actions and prosecutions.

Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, and Co-Chair of the Anti-Money Laundering & Trade Sanctions Group, resident in the New York and Princeton offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in regulatory compliance, BSA/AML compliance and defense, and examinations and enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation; editor-in-chief of the ABA’s Banking Law Committee Journal; and Vice-Chair of the Banking Law Section of the New Jersey State Bar.

Georgia Court Sheds Light on CFPB’s Power to Sue Companies that ‘Recklessly Provide Substantial Assistance’

On September 1, 2015, the Consumer Financial Protection Bureau (“CFPB”) won an important decision in which a federal court, for the first time, interpreted the meaning of “recklessly provid[ing] substantial assistance” under the Consumer Financial Protection Act (“CFPA”).2 Perhaps since it was an order denying the defendants’ motions to dismiss released just before the Labor Day weekend, it has not received much attention. But it has wide-ranging implications for those business-to-business (“B2B”) companies that may have previously thought they could fly below the CFPB’s radar.

The case, CFPB v. Universal Debt & Payment Solutions, LLC, et al., arose from a scheme by some allegedly fly-by-night companies that were collecting “phantom” debt – that is, debt that consumers did not owe.3 In March 2015, the CFPB filed a complaint in the Northern District of Georgia against not only the alleged phantom debt collectors and their owners, but also against the much larger payment processors that enabled them to take debit and credit card payments.4 Since the payment processors did not provide services directly to consumers, the CFPB alleged that they were “service providers” to the debt collectors, and that they had engaged in unfair practices in connection with debt collection. In denying the defendants’ motions to dismiss, the court held the CFPB had alleged facts sufficient to support this count.5

In addition – for the first time in a litigated case – the CFPB included a count alleging that the payment processors also violated section 1036(a)(3) of the CFPA6 by recklessly providing substantial assistance to companies. Following a thorough discussion of what it means to “recklessly provide substantial assistance,” the court found that the CFPB had alleged facts sufficient to support this count. This client alert summarizes the key points of the court’s order.

To continue reading, please click here.