Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.
U.S. Developments
California and New York Take Divergent Approaches to Regulating Fintech
After the OCC began developing bank charters for fintech firms, California’s financial regulator sent a letter to 13 fintech companies seeking a “frank, constructive dialogue” on ways to improve on “the lack of consistency and certainty in the current state regulatory regime.” Jan Owen, commissioner of California’s Department of Business oversight, further stated she is “interested in finding ways to improve the interstate regulatory structure so fintech companies can operate across jurisdictional lines with less cost, regulatory burden, and compliance risk.”
In contrast, by virtue of a proposed FY 2018 budget from Governor Andrew Cuomo, the New York State Department of Financial Services (“NYDFS”) may see significantly expanded oversight and authority over certain fintech companies offering services to residents of New York. If passed, certain measures would increase NYDFS’ authority over and/or impose new licensing requirements on businesses engaged in various insurance, mortgage, or lending activities. At least one measure specifically targets online lending businesses.
These actions illustrate the concerns financial regulators face as they attempt to balance an interest in seeing web-based financial services offered seamlessly throughout the U.S. with an interest in imposing consumer protection measures on financial services companies.
CFPB Lives to Fight Another Day
By order dated February 16, the D.C. Court of Appeals granted the Consumer Financial Protection Bureau’s (“CFPB”) petition for a rehearing on the Court’s October 2016 decision in PHH Corp. v. CFPB. CFPB had ordered PHH to pay an unprecedented $109 million penalty for captive mortgage re-insurance arrangements that CFPB’s director held were impermissible under the Real Estate Settlement Procedures Act (“RESPA”). Following PHH’s appeal to the D.C. Court of Appeals, the October 2016 decision held in PHH’s favor, finding, among other things, that:
- Since CFPB has a single director, removable only for cause, CFPB lacks adequate “checks” on its power in violation of Article II of the U.S. Constitution; and
- CFPB erroneously interpreted the relevant RESPA provisions at issue, or alternatively, CFPB retroactively applied a new interpretation of RESPA, in violation of PHH’s due process rights.
The Court will hear oral argument on these issues on May 24, 2017.
All this comes on the heels of a February 3 Executive Order in which President Trump directed his Treasury Secretary to prepare a report within 120 days identifying laws and regulations that conflict with his financial policy principles. The President made it clear that this Executive Order is aimed at scaling back the Dodd-Frank Act, which created the CFPB.
A New AML Paradigm is Proposed
In a Clearing House Report published February 16, a consortium of stakeholders from both the financial service and law enforcement sectors propose an overhaul in the way financial firms are expected to assist in preventing and reporting criminal activity, including terrorist financing. The Report proposes shifting to a system where law enforcement and investigators relay their priorities, and financial firms report on those priorities rather than reporting every potentially suspicious transaction, as is the current practice. The recommendations are designed to both cut down on the extensive use of resources and reports which yield very limited benefit to law enforcement, and to simultaneously shift those resources to where they can most effectively prevent criminal activity.
Hawaii Legislature May Establish a Blockchain Working Group… In 21 Years.
On January 25, 2017, Representatives Mark Nakashima and Chris Lee introduced HB1481 in the House of Hawaii’s State Legislature. For more information, please visit our sister blog Virtual Currency Report.
North Dakota Legislature Hits Roadblock in Attempt to Study Virtual Currency
After unanimously passing in the Senate, North Dakota’s Senate Bill No. 2100 received a unanimous “do not pass” recommendation from the House committee for Industry, Business and Labor on February 14. For more information, please visit our sister blog Virtual Currency Report.
International Developments
BTCChina Halts Bitcoin and Litecoin Withdrawals
Citing the need to upgrade inspection and verification systems to “aggressively guard against money laundering, illegal money exchange, pyramid schemes, and other illegal activity,” BTCChina announced suspension of bitcoin and litecoin withdrawals until March 15. For more information, please visit our sister blog Virtual Currency Report.