Section 1024(b) of the Consumer Financial Protection Act of 2010 (“Act”) directs the Consumer Financial Protection Bureau (“Bureau”) to supervise each non-depository “covered person,” as defined by the Act, that is a “larger participant of a market for . . . consumer financial products or services” (in addition to those providers of any size who offer residential mortgage loans, private education loans or payday loans or certain related origination and brokerage services). Not later than July 21, 2012, the Bureau must issue a rule defining such persons. Last June, the Bureau released a notice and request for comment regarding the development of this rule. The comment period closed in August (click here for comment docket). One notable issue raised by the comments is whether the Bureau should define larger participants to include persons involved in the online behavioral marketing of financial products. At least one commenter contended that Bureau supervision of these persons is needed because it could be difficult for the plaintiffs’ bar or consumer advocates to identify and challenge fraudulent or abusive practices occurring in the context of advertisements that are individually customized.
From a policy perspective, this argument would seem likely to appeal to the Bureau. It suggests that companies could market financial products and services “in a manner that [is] systematically designed to prey on [consumers’] common psychological biases,” such as impulse buying, while escaping oversight by consumer advocates and private enforcement by the plaintiffs’ bar. (See “Behaviorally Informed Financial Services Regulation,” p. 12)
As a legal matter, however, query whether the Bureau has the authority to define “larger participants” to include behavioral marketers. A larger participant must be a covered person. A covered person is defined as engaging in offering or providing a consumer financial product or service or as an affiliate acting as a service provider to such a person. Thus, a behavioral marketer unaffiliated with a financial institution – but instead serving the institution as an independent contractor – would be a covered person only if it engaged in offering or providing a financial product or service.
The Act defines these terms broadly, as including among other things “analyzing . . . consumer report information or other account information . . . used or expected to be used in connection with any decision regarding the offering . . . of a consumer financial product or service. . . .” Yet, to take one example, if a behavioral marketer delivered an insert for a private-label credit card based on GPS data indicating the consumer’s presence in one of the applicable retailer’s stores, but in doing so the behavioral marketer did not have or use consumer report information about the consumer, or even such account information as the fact that the consumer already had a card from the same issuer, the quoted language would arguably not apply.
The stakes are high. If the behavioral marketer is a covered person, then even if the Bureau determines that it is not a “larger participant,” the marketer could still be subject to Bureau supervision if the Bureau has reasonable cause to determine, by order, that the marketer is engaging in conduct that poses risks to consumers.
Moreover, behavioral marketers’ activities may come within other provisions of the Act, or of other statutes. For example, Section 1025(d) provides that a service provider, as defined by the Act, for a large depository institution or affiliate thereof will be subject to the Bureau’s authority to the same extent as if the Bureau were an appropriate Federal banking agency administering the Bank Service Company Act. Query whether a company performing behavioral marketing for a large depository institution would come within either exception to the service-provider definition, i.e., where the service is solely of a type provided to businesses generally, or where the service consists solely of providing time or space for an advertisement. In addition, other agencies, such as the Federal Trade Commission, are scrutinizing behavioral advertising. Watch for further developments in connection with federal and state privacy legislation, enforcement, and agency activity, particularly as new online and mobile marketing technologies and techniques are launching at a dizzying pace.