Under recent landmark legislation, California will enhance its oversight of consumer financial products and services. This law, known as the California Consumer Financial Protection Law (CCFPL), replaces the Department of Business Oversight with the new Department of Financial Protection and Innovation (DFPI).
We invite you to take our quiz and see how well you know the impact that the DFPI is likely to have on the financial services industry. We promise you will learn a few fun things along the way. Although not required reading, our previous posts1 covered some of the basics of the new law.
1. What were lawmakers trying to accomplish when they passed the CCFPL?
- a. Permit all transactions to move to Bitcoin and other digital currency
- b. Address a void in oversight over financial services and products
- c. Reduce regulation to allow startups to compete with banks
- d. Protect consumers by giving them a private cause of action against companies that commit unfair or deceptive practices
(b). At the time of signing the new law, Governor Gavin Newsom noted, "While the federal government is getting out of the financial protection business, California is leaning into it." Newsom is likely referencing the Consumer Financial Protection Bureau's (CFPB) rollback of enforcement activity during the Trump Administration. Of course, since the CCFPL became law, Joe Biden was elected president and Democrats won a slim majority in the U.S. Senate.
These developments will make it easier for soon-to-be President Biden to replace CFPB Director Kathy Kraninger with a more enforcement-oriented CFPB Director. This means that financial services companies will have to contend with both a well-resourced DFPI and a reinvigorated CFPB.
We expect the state and federal entities will cooperate in investigations and enforcement matters, and also that DFPI will want to stake its turf. The DFPI might, for example, develop a specialized expertise in overseeing FinTechs, many of which are based in California.
2. Under the CCFPL, which of the following organizations should expect additional oversight in California?
- a. Debt collectors
- b. National banks
- c. Payday lenders
- d. FinTech companies
(a) and (d). In a shift from the past, the new law allows oversight over "Persons offering or providing consumer financial products or services in California." Under the law, the DFPI has broad discretion to determine what a "financial product or service" is.
If a product or service is "[e]ntered into or conducted as a subterfuge or with a purpose to evade any consumer financial law" or "[p]ermissible for a bank ... to offer or provide … and has, or likely will have, a material impact on consumers," the DFPI may determine that the financial product or service falls within DFPI's coverage and oversight (subject to some exceptions). Accordingly, FinTech companies, debt collectors, and other service providers that had not been regulated by the state are expected to now be. On the other hand, national banks, trusts, credit unions, and others similar entities are exempt from CCFPL's coverage.
In the good news department, affected companies have time to adapt to their new regulator. The Department expects to begin drafting regulations in mid-2021, with the goal of preparing a registration package with the Office of Administrative Law by end of 2021.
If all goes as planned, registration applications will be accepted on January 1, 2023. In the meantime, there is no need to file registration applications.
3. True or False: DFPI is anticipating regulating digital currency in California.
True! The agency is reportedly looking to adopt a licensing structure unique to the virtual currency industry. Relatedly, DFPI is required to establish a Financial Technology Innovation Office.
The Office is expected to engage with industry participants and consumer advocates and shape DFPI policies. According to Commissioner Manuel P. Alvarez, this aspect of the law "will help us cultivate financial innovation and allow the department to track and regulate emerging financial products so we can serve consumers and licensees in a more meaningful and efficient way."
4. DFPI is expected to encourage which of the following:
- a. Reporting of unethical behavior
- b. Companies to pursue industrial bank charters in California
- c. Earned Wage Access products
- d. Consumer loan products
(b). DFPI is expected to create a path for mature FinTech companies to form industrial banks in California. Industrial banks allow account holders to deposit and borrow money similar to a traditional bank, but they can avoid certain hurdles and regulations that traditional banks face.