By: Dan Frechtling, SVP of Marketing and Chief Product Officer
It’s no secret that there are more and more actors getting into the compliance space. But what are the root causes for all the new rules?
The ETA Strategic Leadership Forum culminated last week with “The Political Perspective on Payments,” an overview of the new rules from US governments and regulators administrating payments.
From the discussion between Ed Marshall of Arnall Golden Gregory LLP, Jonathan Genovese of Vantiv, Jack Marr of TSYS, and Scott Talbott of the ETA, three dynamics emerged as most responsible for elevated rule making. (Out of respect to the panelists, the below follows Chatham House Rule and avoids attributing specific comments to individuals.)
1. Increase in both regulation and litigation
This may be a “new paradigm” because economic theory suggests the two are inversely related, one of the panelists noted. When regulation is active, consumer protection is handled by agencies, which theoretically alleviates the need for class action suits and the like to solve so-called market failures of capitalism. Yet as Dodd-Frank has opened the doors for more regulation, particularly by the CFPB, litigation has gone up as well.
A panelist remarked that a rise in enforcement actions over the past 12 months is accompanied by more class actions. Three class actions in the US Northern District Court of Georgia were cited that targeted processors and ISOs. Another speaker on the panel said his class action colleagues confided over drinks that the payments industry is an appealing domain for new suits.
This redundancy is a troublesome, as noted in the Journal of Tort Law:
The cause for concern lies in the fact that class actions may effectively be duplicative of regulation, and vice versa, in many contexts. Anecdotally, there are class action cases which deal with exactly the same issues as regulators but do so in ways that either contradict regulators’ decisions or sanction essentially the same action twice, generating concern over excessive deterrence.
Further, as the CFPB considers rules that allow it to share exam data with other governments, from state Attorneys General to foreign governments, this could lead to more class action lawsuits as law firms troll for any form of maltreatment.
2. States are becoming more vigorous at the same time the Feds have been active
Notable among this was the New York State Department of Financial Services (NYDFS) a final regulation requiring transaction monitoring and filtering for BSA/AML laundering violations. Other examples include 47 states requiring notification to individuals of security breaches related to personally identifiable information.
Pennsylvania issued an advisory last year that its money transmitter regulations are violated when payment facilitators and ISOs collect money from consumers and forward it to nonprofits and religious organizations. When states’ rules are more stringent than federal rules, the states prevail, a form of “highest common denominator.”
Observed a participant in the panel: “Once there was one FTC, then there were two with the CFPB, now we have 50, for each state.” States may increasingly see the payments industry as a source of revenue — and more palatable than direct taxation
3. Less dialogue between financial institutions and regulators
Compared to other standards, both historical and geographical, we are in an era of shoot first, ask questions later. Regulators’ communication to banks is more punitive and less collaborative. These practices are the result of Dodd-Frank, which itself was a reflexive response to the abuses of the financial crisis.
One of the panelists contrasted the regulatory procedures of Europe. He listened to a European regulator describing PSD2 (which seeks to make cross border payments easier and more efficient in the EU), then the regulator asked for feedback to understand industry concerns. When the US panelist later took the stage and discussed US Operation Choke Point, it was perceived as heavy-handed.
“I heard audible gasps as they couldn’t believe the way we are doing it.”
Another participant likened it to lowering the speed limit for everyone rather than issuing tickets to the speeders. A third panelist added, “then they entice the neighborhood to sue the speeder,” recalling the increase in litigation.
Advice to policymakers was to better understand how payments work and think through the unintended consequences of the next great policy. Washington State was called out for misinterpreting interchange as revenue belonging to processors, therefore taxable in full. It was again made an example for issuing, then trying to retract, rules on waivers from money transmission licensing requirements.
Is there hope?
Two developments suggest some improvement on the horizon. One was the ruling last week by the D.C. Circuit Court of Appeals that the CFPB was unconstitutional. Ironically, it gives the President more power over the CFPB, yet by curbing its independence it is a check of sorts. Another is the promise of an OCC charter to regulate fintech firms, which would rationalize the current patchwork of overlapping rules.
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