REGULATORY CORNER

Comment Sought On Proposed Guidance On Nonbank Financial Firms

The Financial Stability Oversight Council voted unanimously to issue for public comment a proposed analytic framework for financial stability risks. This new framework is intended to provide greater transparency to the public about how the council identifies, assesses, and addresses potential risks to financial stability, regardless of whether the risk stems from activities or firms.

The council also voted unanimously to issue for public comment new proposed interpretative guidance on the Council’s procedures for designating nonbank financial companies for Federal Reserve supervision and enhanced prudential standards. This proposed guidance would replace the council’s existing guidance and describes the procedural steps the council would take in considering whether to designate a nonbank financial company.

The actions proposed by the council would:

Enhance the Council’s ability to address financial stability risks. The financial system continues to evolve, and past crises have shown the importance of being able to act decisively to address risks to financial stability before they destabilize the system. The new proposed guidance would help ensure that the Council can use all of its statutory authorities as appropriate to address risks to U.S. financial stability, regardless of the source of those risks.

Provide transparency to the public on how the Council performs its duties. For the first time, the Council is proposing to issue a framework broadly explaining how it identifies, evaluates, and responds to potential risks to U.S. financial stability, whether they come from activities, individual firms, or otherwise. This framework outlines common vulnerabilities and transmission channels through which shocks can arise and propagate through the financial system. It also explains how the Council considers the tools it will use to address these risks.

Ensure a rigorous and transparent designation process. The proposed nonbank financial company designations guidance would continue to provide strong processes, including significant two-way engagement with companies under review. These processes would minimize administrative burdens on companies under review while providing ample opportunities to be heard and to understand the Council’s analyses. Further, the separate proposed analytic framework explains how nonbank financial company designations fit into the Council’s broader approach to financial stability risk monitoring and mitigation.

Cfpb Issues Guidance To Address Abusive Conduct In Consumer Financial Markets

The Consumer Financial Protection Bureau (CFPB) issued a policy statement that explains the legal prohibition on abusive conduct in consumer financial markets and summarizes over a decade of precedent. The CFPB leads enforcement and supervision efforts to identify and end abusive conduct against consumers. In 2010, in response to the financial crisis, Congress passed the Consumer Financial Protection Act and created the prohibition on abusive conduct. The act tasks the CFPB, federal banking regulators, and states with the responsibility to enforce the prohibition and puts the CFPB in charge of administering it. The policy statement will assist consumer financial protection enforcers in identifying wrongdoing and will help firms avoid committing abusive acts or practices.

“In response to the predatory mortgage lending practices that drove the financial crisis, Congress banned abusive conduct in consumer financial markets,” said CFPB Director Rohit Chopra. “The CFPB issued today’s guidance to provide an analytical framework to help federal and state agencies hold companies accountable when they violate the law and take advantage of families.”

Policy statements provide background information about laws the CFPB administers and articulate how the CFPB will exercise its authority, but they do not impose new legal requirements. In 1980 and 1983, respectively, the Federal Trade Commission issued policy statements on both the unfair and deceptive practices prohibitions. Similarly, today’s guidance summarizes precedent and establishes a framework to help federal and state enforcers identify when companies engage in abusive conduct.

In this policy statement, the CFPB sets forth how abusive conduct generally includes (1) obscuring important features of a product or service or (2) leveraging certain circumstances—including gaps in understanding, unequal bargaining power, or consumer reliance—to take unreasonable advantage. In particular, the statement describes how the use of dark patterns, set-up-to-fail business models like those observed before the mortgage crisis, profiteering off captive customers, and kickbacks and self-dealing can be abusive.

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