Consumer Financial Services and Fintech Enforcement Trends in New York
The New York Department of Financial Services (NYDFS) is New York’s primary regulator of financial institutions, consumer protection, and financial activity. With jurisdiction over more than 1,500 financial institutions, the NYDFS is asserting and expanding its authority due to the perceived absence of federal action concerning consumer protection. In particular, New York has expanded the jurisdiction of current departments, created new offices, and hired former CFPB officials and attorneys to strengthen their consumer protection laws and policies. Just last month, NYDFS hired Leandra English, former CFPB Deputy Director, to serve as a special policy advisor to the Superintendent. Under the direction of Superintendent Linda Lacewell, who was confirmed by Governor Andrew Cuomo in June 2019, NYDFS has committed itself to expanding its investigative and regulatory resources on the fintech industry and consumer protection initiatives.
The New York Department of Financial Services Consumer Protection Task Force
On January 9, 2020, the NYDFS announced the creation of the Consumer Protection Task Force, which will help the department implement the consumer protection proposals outlined in Governor Andrew Cuomo’s recent proposal to expand state oversight and enforcement of the financial services industry. Among other things, the task force would expand the number and types of entities subject to NYDFS’ authority and create a more cohesive state regulatory authority to bring actions against entities engaging in unfair, deceptive, or abusive acts and practices with federal authority.
Specifically, the task force will work on measures relating to: (i) regulatory oversight of debt collectors; (ii) protections against elder financial abuse; (iii) access to affordable banking services; and (iv) consumer protection laws to defend state residents against unfair, deceptive, and abusive practices. As proposed within Governor Cuomo’s agenda, the following initiatives are designed to increase the state’s oversight and enforcement of the financial services industry:
- Abusiveness claims. The proposal would make New York consumer protection law consistent with federal law, aligning the state’s UDAAP powers with those of the CFPB, thereby empowering state authorities to bring abusiveness claims under state law.
- Increase state oversight and reduce current exemptions. Currently, unspecified consumer financial products are exempt from state oversight. The proposal would end exemptions for these products and provides the following as its reasoning: “With the current federal administration reducing the number and breadth of enforcement actions brought by the CFPB, it is crucial that state consumer protection laws apply to all the same consumer products and services subject to Dodd-Frank.”
- Close loopholes pertaining to currently unlicensed companies. Currently, only supervised entities that are licensed under New York’s banking and insurance laws are required to pay assessments to NYDFS to cover associated fees, including examination and oversight costs. Under the new guidelines, state-licensed cryptocurrency companies would be required to pay assessment fees similar to other financial services companies.
- Increase and amend imposed fines. Currently, New York’s Financial Services Law imposes fines of $5,000 per violation. Under Governor Cuomo’s proposal, fees would be capped at the greater of $5,000, or two times the damages, or the economic gain attributed to the violation. Most importantly, the proposal would also update the Financial Services Law to permit the NYDFS with explicit authority to collect both restitution and damages.
- License debt collectors and investigate abuses. Included in the governor’s proposal is the recent development that consumer debt collectors would be licensed by the NYDFS in addition to their existing oversight by the cities of Buffalo, Yonkers, and New York City. The NYDFS would, therefore, be allowed to examine and investigate suspected abuses. The Department’s new oversight authority would allow it to bring punitive administrative actions against debt collectors, and provide the Department with the ability to revoke and suspend licenses and levy fines.
In addition to the above initiatives, the proposal would also authorize minimum standards for student debt consultants, entrusting NYDFS with expanded enforcement authority that would otherwise fall within the purview of the New York State Attorney General. The bill expands the definition of “financial products or services” to include those sold or advertised to small businesses, and would include securities and securities advice sold or advertised to consumers and small businesses.
The Regulation of Newer Technologies and Fintech
NYDFS has also been actively focused on consumer protection initiatives related to financial technology and other innovative products and services. In addition to state emphasis on consumer protection laws and enforcement against unfair, deceptive, and abusive practices, individual states are also working to create a fluid regulatory framework to address the adoption of novel technologies by financial institutions. Most notably, New York has launched fintech advisories within its regulatory agencies to work more closely with companies launching fintech products. As states are characteristically more nimble than the federal government, it is expected that states will both chart the course and play a central role in in addressing unique questions pertaining to digital currencies and money services businesses. This state-led initiative is also a matter of common sense, as the fintech industry is largely regulated at the state level.
In July 2019, the NYDFS superintendent announced the launch of the Research and Innovation Division – a new branch of the state financial services watchdog that will take over the responsibility of both licensing and supervising virtual currencies and other fintech platforms. Created to keep abreast of the rapidly changing consumer financial services industry, the new division will help New York increase financial marketplace participation for early stage fintech companies while protecting consumer rights. Superintendent Lacewell highlighted the Division’s important role in today’s financial services regulatory regime, saying “The financial services regulatory landscape needs to evolve and adapt as innovation in banking, insurance, and regulatory technology continues to grow.” The Division will be led by Matthew Homer, the former head of policy and research at Quovo (now Plaid), a New York fintech company.
In December 2019, the NYDFS announced proposed updates to its BitLicense program, a licensing protocol for virtual currency businesses that had not seen revisions or amendments since its founding in 2015. The BitLicense program requires bitcoin exchanges and other virtual currency operators to comply with consumer protection, anti-money laundering, and capital requirements, among others. NYDFS revised the BitLicense protocol in response to increased demand for consistency, as virtual currency companies complained of uncertainty in how New York both examined and granted licenses to money services business applicants. Creating a cohesive and cooperative examination and licensing system in New York benefits those companies that are seeking to create a presence in a rapidly-growing industry.
Governor Cuomo’s budget and subsequent proposals must be approved by the state legislature before they are enacted. The final forms of the New York mini-CFPB will not be seen for some time. That does not mean, however, that consumer financial services providers should not preemptively assess compliance protocols as state and local regulatory authorities augment their enforcement and supervisory roles. State laws are often more comprehensive than federal laws in two main ways: (i) state laws are often much broader in scope; and (ii) state laws often do not include loopholes or safe harbor provisions. Section 1042 of the Dodd-Frank Act allows state attorneys general and regulators to bring civil actions for violations of unfair, deceptive, or abusive acts and practices. As states increasingly rely on the enabling statute of Dodd-Frank to enforce the CFPB’s federal protections to consumers at the state level, market participants would be wise to allocate greater resources to cover the costs associated with strengthened compliance and monitoring protocol.
This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.