Fintech

CFPB Q1 Circular Summary: Essentials for Mitigating UDAAP Risk for Remittance Transfer Providers, Digital Comparison Shopping Tool Operators, and Lead Generators | Insights and resources

Published

8 months ago

24 May, 2024

In the first quarter of 2024, the Consumer Financial Protection Bureau (CFPB) issued two consumer financial protection circulars, informing remittance transfer providers, digital comparison shopping tool operators, and lead generators of certain practices that may violate the provisions of the Consumer Financial Protection Act. (CFPA) prohibition of unfair, deceptive and abusive acts and practices.

Remittance Transfer Providers

In its March 27 circular, the CFPB explained that remittance providers may violate the CFPA’s prohibition on deceptive acts or practices in advertising the speed or cost of remittance transfers, even if the providers comply with the disclosure requirements of the Remittance Rule. The CFPB’s motivation for issuing this circular appears to have arisen, at least in part, from consumer complaints to the CFPB about remittance transfer service providers obscuring or omitting the cost of remittance transfers in advertising and charging unexpected fees, as well as the oversight and enforcement of CFPB Actions. The circular communicates that remittance transfer providers should:

Speed. Prevent marketing remittance transfers from being delivered within a certain time frame (for example, “instantaneously,” in “30 seconds,” or “within seconds”) if the transfers may actually take longer to reach or be made available to recipients.
Cost. Avoid using terms such as “free” or “no fees” (or similar terms, such as “free”, “no fees” or “zero fees”) in marketing remittance transfers if the transfers are not actually free. Such advertising can be misleading if consumers are charged a fee by the remittance transfer provider or even by an unaffiliated third party over which the provider has no control. Although terms such as “free” are generally considered high risk in advertising (because regulators often view them as bait to lure or entice consumers), even if a fee or cost were disclosed elsewhere (e.g., in disclosures requests, in small print or on a web page), such disclosure does not constitute a misleading advertising communication.
Clarity. Avoid using jargon or confusing language in your ads, and when advertising promotional prices, make it clear to consumers how long the promotional period is and that costs may increase after the period ends.

Operators of digital comparison shopping tools and lead generators

In its February 29 circular, the CFPB warned that digital comparison shopping tools, lead generators, digital intermediaries, and specialized data brokers, including those conducted via website, application, and chatbots (“intermediaries”), that taking unreasonable advantage of a consumer’s reasonable price by relying on an intermediary to act in the consumer’s best interests constitutes an abusive act or practice in violation of the CFPA. The CFPB noted that such a violation can occur even in the absence of substantial harm to the consumer.

The CFPB has defined intermediaries as entities that earn, at least in part, from any of the following activities:

Presenting information about the costs, features, or other terms of financial products or services for comparison shopping purposes
Influence a consumer’s likelihood to select or interact with information about certain products, services or financial providers
Recommend certain financial products, services or providers
Collecting data from consumers and selling that information to one or more lenders to complete a loan transaction

The CFPB believes that a consumer can reasonably rely on an intermediary to act in his or her best interests based on the intermediary’s express or implied statements or communications, or even just the nature of the intermediary’s function in the marketplace, in which the intermediary receives information from the consumer to match the consumer (or purports to help the consumer select) a product, service or financial provider.

To help mitigate the risk of engaging in acts or practices that may be considered abusive by the CFPB, intermediaries should consider the following measures addressed in the circular:

Compensation agreements. Review the terms of supplier agreements for language that establishes dynamic bidding or a rewards system that could signal to a regulator that an intermediary may direct consumers to certain suppliers based on a fee, at least until it has been satisfied a minimum payment volume.
Non-paying suppliers. Present consumers with information about providers from which the intermediary receives no compensation if the intermediary’s service includes few providers. The CFPB explained that presenting a greater number of comparison options (for example, by not excluding non-paying providers) can reduce an intermediary’s risk of an abusive act or practice, especially when an intermediary otherwise includes a very low number of suppliers in its service.
Disclosures. Clearly communicate to consumers whether the options or rankings presented to them are only a subset of available products, services or providers, and whether any options presented are influenced in any way by financial considerations for an intermediary’s business.
Consumer input. Use caution when viewing results in response to input provided by a consumer (for example, information, interests or preferences submitted via a form, survey, filter option, or interaction with a chatbot) to personalize results presented to the consumer. The CFPB believes that obtaining input from a consumer may cause the consumer to reasonably expect that the results he or she receives from an intermediary will be based on the input provided.
Consumer interest. Consider how the options presented are in the consumer’s interest and be able to support consumer-facing marketing claims that communicate that the intermediary:
- Puts consumers first, prioritizes consumers’ interests or preferences, acts on behalf of consumers, or helps consumers achieve their financial goals
- Presents research-based information, objective recommendations, or rankings of options, based, at least in part, on information provided by the consumer or on the consumer’s circumstances
- Provides a one-stop shop for consumers seeking to make an informed selection by matching them with the “best” or “right” offers (for example, promising to match consumers with loans with the best interest rates, finance charges, or repayment periods)
- Is associated with a trusted institution (for example, a college, university, financial institution, or the Federal Deposit Insurance Corporation) or is otherwise experienced in helping consumers evaluate options
Helm. Ensure that similarly situated consumers receive the same offers and that no part of the consumer’s shopping experience directs the consumer to options based on an intermediary’s compensation arrangements with suppliers or benefits that an intermediary might receive if the consumer would reasonably relying on the intermediary to act in the interests of the consumer. This includes, for example, dealing preferentially or generating greater interest in the financial products or services of one intermediary or those of another to increase financial or other benefits to an intermediary when such products or services are more expensive or less desirable than those that the consumer might otherwise prefer. Help may include, in some cases, improved positioning, more dynamic design features, preferential ordering, presenting certain options as “featured,” allowing fewer clicks to view more information, or any other strategy that makes something more likely to be seen or displayed. selected by the consumer.
Ads. Present sponsored or other advertising content that is visually separate and not embedded or intertwined with product rankings, recommendations, or results, such as by reserving advertising for banner or pop-up ads.

Next steps

If you are a remittance transfer provider or intermediary, you should consider reviewing your customer-facing materials and processes for the aforementioned risks of deceptive and abusive acts or practices. You may find that precautionary improvements to your company’s compliance management system, including policies and procedures, training, monitoring and consumer complaint response functions, may also be warranted.

Goodwin is recognized as one of the leading law firms in the United States, partnering with a number of banks and fintech companies, including operators of digital comparison shopping tools and lead generators, to provide expert navigation through a variety of matters and disputes . Whether your company would benefit from a risk analysis of UDAAP exposure and risk mitigation recommendations or from developing or improving your compliance management system to account for the risks identified in the CFPB’s first quarter circulars , contact Kim Holzel, Josh Burlingham, Andrew Kliewer, or the Goodwin attorney you typically consult with.

The Goodwin Fintech team
We operate in every fintech vertical, including lending, alternative finance (e.g., merchant cash advances, access to earned wages, and factoring), payments, escrow, insurance, broker-dealers, and investment advisors. In addition to carrying out product and service development regulatory activities, we assist our fintech clients who choose to provide their solutions through banks in entering into banking and platform partnership agreements.

This disclosure, which may be considered advertising under the ethical rules of some jurisdictions, is provided with the understanding that it does not constitute legal or other professional advice by Goodwin or its attorneys. Previous results do not guarantee a similar result.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

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Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”