Editor’s note: Authored by Yulia Makarova, this article was originally published in Law360.
In an increasingly globalized world, national and international regulatory authorities have repeatedly signaled that working together to develop effective policies for regulating and supervising financial markets is a key priority.
In 2018, the U.S. Consumer Financial Protection Bureau, or CFPB, announced an initiative to create the Global Financial Innovation Network to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries.
Across the pond, the European Union has played a key role in cultivating international cooperation on financial regulation.
With U.S. and EU regulators facing shared challenges with respect to fast-developing technology, a dialogue between the CFPB and the European Commission is a logical step aimed at cultivating international regulatory cooperation.
This will be done via its directorate-general for justice and consumers, the body that develops and monitors the implementation of policies to ensure that the EU is an area of freedom and security without internal borders.
Protecting Consumers
The statement published on July 17 by CFPB Director Rohit Chopra and European Commissioner for Justice Didier Reynders announced the beginning of an annual — at least — informal dialogue, focusing on strengthening consumer financial protection.[1]
The dialogue seeks to facilitate better policy coordination and exchange of insights and experience on a range of financial consumer protection issues.
In the statement, both regulators aim to address perceived key challenges created by the increasing digitalization of financial products, “from pricing and customer service to competition and privacy.”
The agencies cited, for example, the increasing use of automated decision making and artificial intelligence, new products such as buy-now-pay-later, and the role of Big Tech in digital payments.
The statement highlights that while policymakers are responding to these issues, the regulatory and enforcement agencies believe that more must be done in order “to compete with the pace of evolving markets and consumer needs.”
AI in Focus
The use of AI is fast becoming one of the key issues that the regulators must grapple with.
This is demonstrated by Chopra’s comments in May when he stated that the CFPB has been intensifying its AI enforcement efforts.[2] In its June 2023 spotlight analysis on AI chatbots in banking,[3] the CFBP also highlighted instances where chatbots were noncompliant with federal consumer financial protection laws that diminished customer service and trust and could cause harm to consumers.
In the EU, the commission intends to find a proportional and fair way to regulate AI. In April 2021, the commission proposed the first EU regulatory framework for AI, also known as the AI Act.[4]
The European Parliament has stated that its priority is to make sure that AI systems used in the EU are safe, transparent, traceable, nondiscriminatory and environmentally friendly.
The aim is to reach an agreement by the end of 2023. Once approved, this regulatory framework is expected to become the world’s first rules on AI.
Big Tech
In the statement, the CFPB and the commission listed several issues of concern, including data privacy and security, unfair competition and financial stability, in committing to further dialogue focused on potential risks in Big Tech.
This too ties to the concerns cited repeatedly by the CFPB, including its announcement of an inquiry into data brokers in March.[5]
In this inquiry, the CFPB sought information about business practices employed in the market to inform the CFPB’s efforts to administer the law, including planned rulemaking under the U.S. Fair Credit Reporting Act.
The CFPB investigated the business models and practices of the data broker market, including details about the types of data the brokers collect and sell and the sources they rely upon.
In the EU, the Digital Markets Act[6] that became effective, for the most part, on May 2, intends to ensure a higher degree of competition in European digital markets by preventing large companies from abusing their market power and by allowing access for new players.
It has established a list of obligations for designated gatekeepers, mainly large digital platforms providing core platform services, such as online search engines, app stores and messenger services.
The Digital Markets Act is one of the first regulatory tools to comprehensively regulate the gatekeeper power of the largest digital companies.
New Forms of Credit
Securing a consistently high level of protection for consumers taking out credit and contributing to consumer confidence has long been a key priority for the regulators.
In the statement, the CFPB cites concerns about the over-consumption of new forms of credit and over-indebtedness of consumers. The CFPB has repeatedly flagged concerns in connection with consumer credit products, including in its March consumer use survey.[7]
The survey concluded that while many buy-now-pay-later borrowers used the product without any noticeable indications of financial stress, buy-now-pay-later borrowers were, on average, much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products and use high-interest financial services such as payday, pawn, and overdraft compared to non-buy-now-pay-later borrowers.
They are more likely to also have traditional credit products like credit and retail cards, personal loans, and student loans, but have lower liquidity and savings compared to non-buy-now-pay-later borrowers.
In 2021, the commission adopted a legislative proposal[8] to revise the existing EU consumer credit directive[9] to cover buy-now-pay-later products to ensure increased transparency and better consumer protection resulting in higher consumer confidence.
The general goals of this review are to reduce the detriment to consumers taking out loans in a changing market and to facilitate cross-border provision of consumer credit and the competitiveness of the internal market.
Fair Lending
The CFPB has long focused on the themes of fair lending and equal access.
In its 2022 Fair Lending Report to Congress, the CFPB indicated that as a result of its annual risk-based prioritization process, it focused much of its 2022 fair lending supervision efforts on mortgage origination and pricing, small business lending, policies and procedures regarding geographic and other exclusions in underwriting, and on the use of automated systems and models, such as AI and machine learning models.[10]
The statement aligns with the continued focus on more regulatory oversight in the EU.
This is evidenced by the commission’s proposed reform of the current EU rules on distance marketing of consumer financial services published in 2022,[11] which aims to bring EU regulation in line with the digitalized financial sector by strengthening consumer rights and fostering the cross-border provision of financial services in the single market.
What’s Next?
As technology continues to evolve and with a tidal wave of new regulation on the horizon for the EU, the regulators are focused on coordinating efforts to tackle perceived consumer protection issues in the ever-changing regulatory landscape.
The regulators have committed to keeping an ongoing dialogue on the key areas of concern involving subject-matter experts and market participants.
As technological advancement outpaces the development of regulation, we should expect more activity in international regulatory cooperation beyond the issues flagged in the statement as the regulators across the globe seek to keep abreast of change.
[6] Regulation (EU) 2022/1925, commonly referred to as the Digital Markets Act (DMA), is an EU regulation that aims to make the digital economy fairer and more contestable. The regulation proposed by the European Commission in December 2020 was signed into law by the European Parliament and the Council of the EU in September 2022. It entered into force on 1 November 2022 and became applicable, for the most part, on 2 May 2023.
[8] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52021SC0170&from=EN.
[9] Directive 2008/48/EC.
[10] https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_fair-lending-report_2023-06.pdf.
[11] https://ec.europa.eu/commission/presscorner/detail/en/ip_22_2979.
