In an effort to promote compliance and certainty, the Consumer Financial Protection Bureau (CFPB or Bureau) on January 24 issued an often promised and much anticipated policy statement regarding how it intends to apply the “abusiveness” standard in supervision and enforcement matters. The Dodd-Frank Act (Act) is the first federal law to broadly prohibit “abusive” acts or practices in connection with the provision of consumer financial products or services. The Act deems an act or practice to be abusive when it “(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

California Governor Gavin Newsom submitted his $222 billion budget proposal for the 2020-2021 fiscal year on January 10. Among other priorities identified, the budget earmarks tens of millions of dollars for the creation and administration of the California Consumer Protection Law (CCPL). The governor’s budget proposal specifically notes the need for this expanded consumer protection law as arising from “[t]he federal government’s rollback of the CFPB [which] leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Under the proposal, California’s Department of Business Oversight (DBO) would dramatically expand its consumer protection role to define the contours of, and to administer, the CCPL. The stated aim of this move is to enhance consumer protection in California and “foster the responsible development of new financial products.”

Should California’s lawmakers adopt this proposal, the DBO would be renamed the Department of Financial Protection and Innovation (DFPI). In an expansion of the DBO’s current role, which includes consumer protection in financial transactions and oversight of state-licensed financial institutions, the renamed agency would gain greater authority to “pursue unlicensed financial service providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies, and financial technology (fintech) companies, among others.”

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the US Department of the Treasury’s Financial Crimes Enforcement Network, in conjunction with the Conference of State Bank Supervisors, issued a joint statement on December 3 to provide more clarity regarding Bank Secrecy Act (BSA) compliance for banks that service customers with hemp-related businesses.

In a recent post, we discussed the increasing focus by state attorneys general on the use of their enforcement authority against payment processing applications platforms that were not licensed under state money transmitter laws. As we pointed out, one of the challenges raised by these state laws is the fact that they are not uniform in either their language or how they are interpreted or applied.

In the spirit of looking at the glass-half-full aspects of these developments, it is worth pointing out that the Conference of State Bank Supervisors (CSBS) is undertaking an initiative to develop model payments legislation with the goal of increasing uniformity of state legislation in this area. The multistate licensing initiative is part of Vision 2020, a set of initiatives that CSBS and state regulators are implementing to harmonize the multistate licensing and supervisory experience for nonbank financial services providers, including fintechs. One primary area of focus for the CSBS is state money transmitter legislation. To this end, a committee of state financial institution supervisors, under the auspices of the CSBS, has developed model language for money services businesses, and recently published this model language for public comment. The model language focuses on areas such as core definitions of money transmission–related activities, money transmitter exemptions, control and changes in control of money transmission businesses, financial condition issues, and interstate parity and coordination activities.

A working group composed of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the US Department of the Treasury’s Financial Crimes Enforcement Network issued a joint statement on July 22 that is intended to provide greater clarity regarding the risk-focused approach used by examiners for planning and performing Bank Secrecy Act (BSA)/anti-money laundering (AML) examinations.

On the theory that three’s a charm, our third and final blog on Hong Kong private equity activities will take a look at Asset Management (Type 9) activities, which are among the most relevant regulated activities for private equity firms in Hong Kong.

 Asset Management (Type 9) covers managing, on a discretionary basis, portfolio of securities for and on behalf of a third party. If a private equity firm is licensed by the SFC to carry out the regulated activity of asset management, then in addition to being able to exercise discretionary portfolio management, such firm is able to rely on what is commonly referred to as the “incidental exemption” and market funds under its management or sub-management, without the need to obtain a separate Type 1 license. The Type 9 license is therefore very flexible.

In our first blog on Hong Kong private equity licensing, we looked at Dealing in Securities (Type 1). This second blog deals with Advising on Securities (Type 4).

Advising on Securities (Type 4) includes not only giving advice on acquiring or disposing of securities, but also advising on the terms or conditions on which securities should be acquired or disposed of. There is an important "intra-group" exemption for the requirement for a Type 4 license, and many private equity firms have traditionally relied on this to conduct advisory activities in Hong Kong. This exemption is available if advice on securities is provided by the private equity firms in Hong Kong to (i) any of its wholly-owned subsidiaries; (ii) a holding company which wholly owns the private equity firms; or (iii) wholly-owned subsidiaries of its holding company. The recipient of the advice, recommendation, or research should assess the advice, recommendation or research (as the case may be) and has the discretion to reject it, before issuing the material to its own clients in its own name. In other words, the recipients must assess the advice, and not merely rubber-stamp it.

In keeping with our interest in global financial regulatory developments, in this and two blog posts to follow, we examine recent regulatory developments and responses in the active Hong Kong private equity markets.

Historically, the most popular setup of private equity firms in Hong Kong involve a Hong Kong onshore investment adviser providing advice to an offshore investment manager or a general partner in the Cayman Islands. The Hong Kong investment adviser will typically be a wholly owned subsidiary of the offshore entity. If structured in this manner and subject to certain additional parameters, the Hong Kong investment adviser will be able to operate without any licence in Hong Kong as the Hong Kong investment adviser will be able to rely on what is commonly referred to as the “intra-group” exemption.

The Financial Crimes Enforcement Network (FinCEN) recently issued guidance consolidating current FinCEN regulations, rulings, and guidance about cryptocurrencies and money services businesses (MSBs) under the Bank Secrecy Act (BSA). Along with the May 9 guidance, FinCEN issued an advisory to assist financial institutions in identifying and reporting suspicious activity or criminal use of cryptocurrencies.

The Federal Reserve Board (Fed) released on April 23 a notice of proposed rulemaking to clarify the standards and criteria under which one company “controls” another company under the Bank Holding Company Act (BHCA) and the Savings and Loan Holding Company Act (SLHCA). This long-awaited proposal, which Fed officials have stated for some time was in the works, is notable for several reasons—primarily because if adopted, it will bring much-needed clarity to an area of banking law that historically has been notoriously opaque.