Consumer protection provisions in the Dodd-Frank Act


Although the consumer protection provisions of the Dodd-Frank Act and similar recent legislation in other countries focus on the retail market, by implication this also encompasses many Small and Medium-Sized Enterprises (SMEs). Furthermore, many of the new measures being put in place by financial institutions will in time percolate upwards to benefit larger corporates as well. Sathya Ram, Regional Head of Clearing and Foreign Currency Payment Products of Global Payments and Cash Management for Asia-Pacific at HSBC, explores some of the implications of the legislation in Asia for corporate treasury and finance functions.

Dodd-Bridge

Dodd-Frank is just one example of the legislation being introduced around the world in the wake of the 2008 financial crisis. The Act covers a wide range of financial matters, but the provisions in Title X and XIV directly affect the protection of consumers. These include the creation of a Bureau of Consumer Financial Protection and numerous other items relating to fair lending practices.

However, for those involved in sending payments, Section 1073 of Title X of the Act is of the greatest interest. Section 1073 introduces a number of important changes relating to remittance transfers. For instance, when a sender asks to make a remittance transfer, payment providers must disclose in advance the net amount of currency the recipient will receive, any fees chargeable, and any exchange rate used. Furthermore, when the sender makes the payment in connection with the remittance transfer, the payment provider must supply a receipt also showing the promised date of delivery to the designated recipient[1].

Legislation implemented in other countries is not quite as extensive as the consumer protection provisions of the Dodd-Frank Act but the direction of travel is clear – banks will have to be much more transparent when dealing with their customers. These rules are generally aimed at the retail market but if bank-wide systems changes are needed to deliver to these standards, banks may use this as an opportunity to upgrade their service to corporates as well. This could lead to more transparency on payments charges and, in particular, greater advanced disclosure on transaction processing times and charges.

 

Domestic consequences

In 2011 the G20 countries agreed on the key high-level principles of a framework for financial consumer protection[2]. This goes beyond just payments and cash management and also covers Treating Customers Fairly (TCF), which incorporates matters such as disclosure, transparency and mis-selling. These measures therefore place the onus on the bank in ensuring that clients fully understand a product before they buy it.

From a client perspective, this new approach provides various benefits, especially in terms of transparency and information reporting. In the case of payments, all charges for the entire transaction must be disclosed in advance (including any foreign exchange (FX) exchange rate costs or country taxes), as must the timeline. This should promote competition, as clients will be able to make like-for-like comparisons of total costs and speed of processing.

These changes have major implications for banks involved in making overseas payments on behalf of domestic clients. A major challenge for remitting banks will be ascertaining the charges from all the intermediary banks and their processing times.

It will be important for banks to find banking counterparts around the world that can deliver the level of service and transparency required to allow the originating bank to comply with the consumer protection provisions of the Dodd-Frank Act. Furthermore, these counterparties will also need to be prepared to make legal commitments on both their service levels and the reliability and accuracy of any information that will be passed onto the consumer.

Finding overseas banks able to fulfil these requirements is unlikely to be easy and smaller banks may exit the cross-border payment business in the consumer space. However, it may create new opportunities for the relatively few banks outside the US that can deliver the right level of local service. Where domestic banks have the volumes to justify a continued presence in cross-border consumer payments, they may well focus on a smaller number of banks for their key transaction corridors. The scale of flows from the US to Mexico, China and India are likely to mean that these corridors remain well covered but competition in niche corridors may reduce because the traffic will not justify the regulatory burden. Those most likely to benefit will be those that have an extensive global network, direct connectivity to local clearing systems and local knowledge. An additional need here will be for consistency in terms of both service and the transmission of data.

 

FX and national consequences

The requirement in the consumer protection provisions of the Dodd-Frank Act that remitting banks must inform customers of FX conversion rates in advance may also drive major change. Previously, normal practice has been for receiving banks to do FX conversions locally once the payment arrived. This will no longer be possible, as the remitting bank would not be able to inform the customer of the FX rate in advance.

As a result, FX conversions will probably now have to be executed at the originating, rather than receiving, end[3]. This presents banks in developed markets where remittances are originated such as the US with an opportunity to generate new FX revenues, rather than just sending payments and receiving a fee as before.

A similar situation applies to the G20 framework. As countries compare progress in their implementation of this in the form of local procedures, it is likely that a measure of competition will arise among central banks in relation to the stringency or sophistication of their processes for receiving payments from overseas.

 

Corporate implications

As yet, the consumer protection provisions of the Dodd-Frank Act and comparable legislation in other countries has had no major impact on larger corporations. However, in markets such as Hong Kong where many SME corporates are one or two person operations, there is a major overlap with the consumer segment. Therefore, in countries with this sort of small corporate demographic, SMEs will be in the first wave to benefit from transaction and product transparency alongside retail customers. Elsewhere, larger businesses may be beneficiaries in a second wave.

Most governments will probably assume that large corporates are sufficiently financially sophisticated not to need protective measures defined in legislation. However, if banks are already making systems and training investments to comply with legislation relating to consumers and SMEs, there is a good opportunity to extend the resulting benefits to their larger corporate clients. So the key principles in the consumer protection provisions of the Dodd-Frank Act and similar legislation could be applicable in practical terms across all client segments.

 

The principles of Treating Customers Fairly

A core element of the new TCF principles is that regulators will have the power to ensure that banks comply with these rules. In some cases, these checking and auditing processes are already underway. Among the most important TCF principles is the requirement that products must meet client specific needs. The effect of this will be that a blanket promotion of a product across a complete client segment is not permitted; the needs of the individual consumer must first be understood. Another related TCF principle is the requirement to make products broadly available; imposing unreasonable barriers to exclude certain (unprofitable) customer sub-segments is not allowed.

The translation of these broad principles into on the ground procedures for salespeople is up to each bank. This also applies to the steps involved in explaining the terms of a product (including fees and potential risks) to a client. Comprehensive (and comprehensible) disclosure must be made so the client has all the necessary facts to hand before making the decision whether or not to purchase.

Collectively, the work involved in complying with all these principles could cause some banks to change their business strategies. The cost and effort of compliance may exceed anticipated returns and so they may simply choose to quit particular businesses and just focus on core lending and deposit taking. Alternatively, they may choose to outsource certain products and activities to larger global banks that have the necessary scale and capabilities to deliver compliant solutions on a third party basis.

 

Pricing transparency and competition in Asia

To date, Asian banks have not made major changes as a result of the consumer protection provisions of the Dodd-Frank Act. In many markets the focus is still primarily on domestic regulation, with the international angle being something that will be addressed later. At a domestic level, transparency in Asia is reasonably advanced because banks in many countries are already required to publish full details and pricing in their branches, printed documentation and online. Another possibility is the adoption of an ASEAN regional approach to transparency at both a domestic and international level. This would deliver considerable economies of scale as well as minimising fragmentation and could be applied alongside an ASEAN-wide approach to Anti-Money Laundering (AML) measures.

Non-bank providers of transaction services may also become more active in the market, particularly in areas such as mobile payments. While many of these providers are well-established, their market share has been limited because in many markets they are not formally regulated. Some central banks are already looking to new providers to help develop the market and further empower the consumer through competition. In other countries this promotion of competition may become a defined part of the financial regulator's role, as has already happened in the UK with the competition department that is part of the Financial Conduct Authority (FCA).

 

Emergence of legislation in Asia

It seems probable that the development of any Asian legislation comparable to the consumer protection provisions of the Dodd-Frank Act might happen in a gradual manner. However, many Asian markets are recipients of remittances from abroad, hence the focus from a regulatory standpoint could relate more on transparency and service levels for inward-bound rather than outward-bound payments. Nevertheless, many central banks in Asia will be watching and waiting to see what happens in the aftermath of Dodd-Frank. Based upon that they will then consider how best to implement their own legislation, so sudden change across the region seems improbable. The initial focus will be on strengthening their domestic position, before considering measures with regional or global implications.

 

Conclusion: country and bank competition

Significant as it is in its own right, the consumer protection provisions of the Dodd-Frank Act are in a sense the first step in a much broader programme of global client protection measures likely to emerge over the next few years. The interaction of the resulting legislation, particularly relating to cross-border transactions, will have an important influence on countries' relative competitiveness. In this context, many central banks and governments will be considering how best to position their country to ensure that business and investment is not impeded by their own or other countries' legislation.

Parallel changes will be taking place in the banking market. Some banks will choose to exit certain businesses because of the regulatory overheads, while more sophisticated banks with scale economies and large networks will probably benefit, both directly and as third party providers of services that smaller banks can no longer justify running in-house.

These changes have important implications for corporates. On the one hand there is the possibility that there will be fewer banks offering global payments. On the other, there is the likelihood of greater transparency on matters such as payment charges and processing times, plus the prospect (under TCF principles) of products being more broadly available. However, whatever the final outcome, it is apparent that this is an extremely fluid environment that is worth monitoring in the interim.

 

[1] Section 1073 is technically an amendment of The Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) https://www.govtrack.us/congress/bills/111/hr4173/text/enr#link=X_G_1073_a&nearest=HD883F50722C941A58D2C761D28E4FDC5.

[2] "G20 High-level Principles on Financial Consumer Protection", OECD, October 2011, http://www.oecd.org/regreform/sectors/48892010.pdf

[3] However, in certain Asian countries offshore conversions are not allowed.


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