BPInsights: January 6, 2024

Tech Messengers Linking Consumers’ Financial Accounts Need Stronger Rules

BPI and The Clearing House Association submitted recommendations to the Consumer Financial Protection Bureau on Friday in response to a proposed rule establishing how banks, data aggregators and other third parties can safely share consumer financial data. The rule seeks to discourage unsafe practices such as screen scraping and give consumers more control over how, with whom and for what purpose their data is shared. The associations argue that the proposal does not go far enough in protecting sensitive consumer financial data or requiring data recipients to comply with these rules.

“Our members welcome the competition brought about by innovative financial technology firms and are prepared to support the ability of bank customers to connect their bank accounts to the third-party apps of their choice, but such competition cannot come at the expense of data security,” the associations wrote in their letter. “It is critical that consumers’ personal and financial information remains secure when it is shared between financial institutions and third parties and when it is stored outside of the financial institution.”

The associations call on the CFPB to take the following actions to strengthen its proposal:

  • Strengthen consumer protections: Many of the requirements in the proposed rule designed to protect consumers and their data, such as the requirements related to consumer authorization and the permissible uses of consumer data, should apply to all third parties and data aggregators in the ecosystem, and to all data.
  • Ban screen scraping: Screen scraping should be prohibited once a data provider has made a developer interface available.
  • Set unambiguous regulatory requirements and supervise for compliance: The CFPB should impose direct requirements on authorized third parties and data aggregators and articulate its intent to supervise those entities for compliance.
  • Clearly define liability: Aggregators and other data recipients should be liable for unauthorized transactions or failing to protect consumer data once data is within their possession.
  • Customers must explicitly authorize how their data is accessed and used: The proposal would require third parties to obtain consumer authorization before accessing their data. Data providers must have the right to obtain their own consumer authorizations before sharing consumer data with an authorized third party or data aggregator.
  • Permit data provider compensation: Data providers should be allowed to receive compensation from third parties to recover their commercially reasonable costs and a margin to cover the cost of enabling data sharing. By prohibiting only data providers from charging fees, the proposed rule arbitrarily distorts the marketplace and creates an unfair allocation of benefits to data aggregators and an unrecoupable cost to data providers.
  • Recognize the utility of standard-setting bodies: The final rule should continue to recognize that a standard-setting body is best positioned to develop a standardized format for data sharing. The final rule should extend to the CFPB’s expectations with respect to the use of standard data formats by data aggregators to ensure efficiencies and support competition.

To read more, click here.

2. BPI Welcomes FinCEN Rule Empowering Banks with Helpful Data to Fight Financial Crime

The Financial Crimes Enforcement Network finalized a rule recently giving banks access to a directory of business ownership information used to help fight money laundering and other financial crimes. This rulemaking is one of several key milestones FinCEN is undertaking as it works to fully implement the Corporate Transparency Act.

What we’re saying: Gregg Rozansky, BPI senior vice president and senior associate general counsel, issued the following statement in response: “BPI strongly supports FinCEN’s effort to implement the Corporate Transparency Act effectively and in alignment with Congressional intent. This rule recognizes the importance of protecting the privacy of business owners while giving banks and law enforcement access to helpful data to fight money laundering, sex trafficking and other financial crimes.”

Additional background: The “Access Rule” gives financial institutions, law enforcement and other authorized users conditional access to a directory of data containing information on who either owns a company, or holds equity interest in the company (i.e., a beneficial owner). This data is critical in the fight against financial crime because it makes it harder for illicit actors to hide behind anonymous shell companies to evade detection.

The Access Rule is the second of three key milestones of the Corporate Transparency Act.

  • The first milestone was in developing the beneficial ownership directory and establishing rules for how companies report this information to FinCEN.
  • The second milestone, the Access Rule, establishes who can access the directory and how the data can be used.
  • The third and final milestone relates to FinCEN’s modernization of the customer due diligence rule — which requires financial institutions to “know their customers” — to align with the CTA.

What’s next: Businesses are required to begin reporting beneficial owner information on Jan. 1, 2024. The Access Rule will not be effective until Feb. 20, 2024.

3. Farmers Urge Banking Agencies to Preserve Affordable Hedging

Farmers called on U.S. banking regulators to reconsider the Basel capital proposal, which could raise the cost of hedging price risks in agriculture supply chains. “We are concerned that recent bank capital proposals will have unintended consequences for the health of US derivatives markets and make hedging significantly more expensive for all market participants,” a group of trades representing farmers said in a December letter to banking agency officials. “We urge you to reconsider the proposal and avoid taking actions that will harm end-users in the real economy.”

4. The Missing Piece for Keeping Low-Income Students in College: Credit Cards

Preventing lower-income college students from dropping out of school is a crucial policy goal to support upward economic mobility. One key factor in student retention suggested by a recent Federal Reserve Bank of Boston study: credit cards. Credit card loans enable students to weather temporary cash shortfalls and decrease their reliance on working while in school.

  • Notable study: Lower-income college students are comparatively dependent on income from jobs for staying in school – and losing those jobs can be detrimental in the absence of temporary sources of credit. A recent study shows that job loss had minimal effects on working students’ college enrollment decision from 2000—01 to 2008-09, but it was associated with an 18-percentage-point increase in the college dropout rate in the period spanning the 2009–10 through 2018–19 school years. During the same period, credit supply to college students through credit card loans dropped dramatically as the CARD Act of 2009 restricted such credit. The study finds evidence that “the liquidity effect of job loss on college persistence declines with student leverage of credit card loans” and that “credit card loans disproportionately increase student retention rates in post-secondary institutions whose enrollment includes a higher share of lower-income students.”
  • Bottom line: “These analyses reveal coherent evidence across different data sources that credit card loans provide essential liquidity for financially constrained students to smooth their consumption and education investment over temporary liquidity shocks.”

5. ‘Biggest Risk’ for Large Banks: More Capital Than They Need

Former Wells Fargo CEO Dick Kovacevich cautioned that the biggest risk facing large banks is the massive proposed increase in capital requirements. In other words, a policy that aims to mitigate risk could actually increase it. Kovacevich made the comment in a recent CNBC interview.

  • Key quote: “I do think … all big banks are in a good position and have very good dividend yields. And I think they have more to run. I think the biggest risk that the big banks have is that the Fed causes them to need much more capital than they need. I don’t think the big banks need any more capital than they already have relative to their risk. And so we’ll see how all this plays out. But … the greatest risk is not the business risk as such. It’s the regulatory risk. And I think it’s very unfortunate, because I think what’s happening is that the Fed is trying to hide the fact that they did not see the risk that almost everybody else saw in the spring from Silicon Valley Bank and Signature and so on. And they’re trying to blame that issue on not having enough capital, when, in fact, it was a mistake by the regulators, a huge mistake, that they didn’t do their job right.”

In Case You Missed It

BPI Response to DOJ Crackdown on Fraudulent Microtransactions

BPI’s Senior Vice President for Fraud Reduction, Greg Williamson, responded to a recent Department of Justice announcement that it is cracking down on networks that steal money from consumer accounts and use fraudulent “microtransactions” to hide the activity from banks: “We strongly support the Department of Justice’s commitment to protect the American consumer with these legal actions targeting those who deceive consumers and steal money from their accounts.  Trust in our payments systems is of the utmost importance and these actions by the Justice Department are a critical step to deterring fraudulent activity and attacking the criminal organizations that prey on U.S. consumers.”

The Crypto Ledger

Here’s the latest in crypto.

  • CBDC skepticism: As many countries consider central bank digital currencies, some central banks are less than enthusiastic, reported The Economist. “After doing their homework, central bankers from Denmark to Japan have expressed scepticism. Sweden’s government released a 900-page report in March arguing that the case for a CBDC was weak, citing the nation’s already advanced payment system. An economist at a major central bank observes that digital-payment systems already provide most of the benefits of a CBDC.” The article also notes that “CBDCs … pose new questions”, such as whether customers would flock to them in times of stress, decreasing financial stability.
  • FTX seeks funds: Bankrupt crypto exchange FTX is trying to claw back money it is allegedly owed, according to the Wall Street Journal. FTX is turning to lawsuits to recover funds from a fellow bankrupt crypto firm, venture capitalists, former founder Sam Bankman-Fried himself – and Bankman-Fried’s parents.
  • No second trial for SBF: Recently convicted FTX founder Sam Bankman-Fried will not face a second trial, Reuters reported.

Morgan Stanley’s Gorman: ‘Aggressive’ Capital Proposal Will Likely Change

The “extremely aggressive” proposal to raise capital requirements for large U.S. banks will likely change meaningfully before becoming final, Morgan Stanley Chairman James Gorman said in a Bloomberg interview this week. “It was a proposal that I would say was extremely aggressive and set a marker. It will not go through in that form,” Gorman said. “If it did, I think it would have very, very negative consequences for corporate lending across this country, which is not what you want. It’s not going to help the economy grow.”

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.