By David Beam, Mayer Brown LLP
It’s often unclear how legal requirements apply to innovative financial products and practices. This cloud of legal uncertainty can add to the myriad obstacles to successfully bringing a product to market. Uncertainty arising from the application of old laws to new practices is a particular challenge for the payments industry right now.
To help alleviate this problem with respect to laws under its jurisdiction, the Consumer Financial Protection Bureau recently issued a policy on no-action letters. A no-action letter from the CFPB will “include a statement that the staff has no present intention to recommend initiation of an enforcement or supervisory action against the requestor with respect to particular aspects of the product, under specific identified provisions of statutes or regulations.” No-action letters will be reserved for situations where there exists “substantial regulatory uncertainty” concerning the application of specific statutes and regulations to a new product.
No-action letters may, in some situations, provide payments companies with a degree of assurance that a product or practice will not lead to an enforcement or supervisory action by the CFPB. However, a careful review of the policy shows that there are some potentially significant limitations on the usefulness of a no-action letter. There also are some facts that companies should consider carefully before submitting a request for a no-action letter.
This article provides an overview of the policy and discusses factors to consider before submitting a request for a no-action letter. This article is not, of course, intended to be a detailed guide to the policy or the application process. Anyone who wants to seek a no-action letter should review the policy carefully and consult with appropriate legal counsel.
The Process for Obtaining a No-Action Letter
To obtain a no-action letter, a company must submit detailed information about the proposed product and its business plans. This includes, among other things:
- A description of “how the product functions, and the terms on which the product will be offered.”
- “The timetable on which the product is expected to be offered.
- “An explanation of how the product is likely to provide substantial benefit to consumers differently from the present marketplace.
- “A candid explanation of potential consumer risks posed by the product . . . and undertakings by the requestor to address and minimize such risks.”
- A description of the consumer safeguards that the requestor will employ, even if not required by law.
- Disclosure of whether the request or “any other party with substantial ties to transactions involving the product” are subject to ongoing, imminent, or threatened enforcement action or private lawsuit with respect to the product or any similar product.
- For every principal of the requestor, disclosure of all “license discipline, adverse supervisory action or enforcement action with respect to any financial product, license, or transaction within the past 10 years.”
The policy makes clear that no-action letters “will be provided rarely and on the basis of exceptional circumstances.” To obtain a no-action letter, a requestor will need to provide “a thorough and persuasive demonstration of the appropriateness of such treatment.” This should include “any particular reasons why [the requestor’s] request should be considered by the bureau to be a matter of special importance.”
Issuance of a No-Action Letter
The policy identifies four ways that the CFPB staff may respond to a request for a no-action letter:
- Grant the request in whole or in part (possibly subject to limitations or conditions);
- Deny the request;
- Specifically decline to grant or deny the request, with an explanation; or
- Specifically decline to grant or deny the request, without an explanation.
The policy says that decisions to grant a no-action letter generally will be published on the CFPB’s Website, whereas denials generally will not be published. The policy says that a decision specifically to decline to grant or deny the request may be published on the Website, “particularly if the staff believes that the information will be in the public interest.”
The policy lists nine non-exclusive factors that the staff may consider when decided whether to issue a no-action letter. Requestors should read the full list in the policy. The highlights are:
- Whether the product is structured and marketed in a way that is fair to consumers and not deceptive;
- Whether the product will provide substantial benefit to consumers not already available in the marketplace;
- Whether the product presents any risks to consumers, and how effectively the requestor mitigates those risks;
- Whether there is “substantial regulatory uncertainty,” and whether that uncertainty is best addressed through a no-action letter (instead of other means, like a rulemaking or issuance of other guidance);
- Whether the requestor provides and is willing to provide the CFPB with sufficient information to learn about the product;
- Whether the request is sufficiently tailored and focused.
The policy identifies four non-exclusive reasons that the CFPB may decide neither to grant nor to deny a request:
- The requestor or its principals are the subject of an ongoing investigation, supervisory review, or enforcement action with respect to the product or a related or similar product;
- The request concerns an area where the CFPB is engaged in or contemplating rulemaking, supervisory, enforcement or other initiatives;
- The staff concludes that the request concerns a matter that is inappropriate for no-action treatment;
- The staff decides not to invest the CFPB resources that will be required to address the request adequately.
Limitations of No Action Letters—and Risks of Requesting One
A no-action letter will provide the requestor with some assurance, but it is not a get-out-of-jail-free card. There are several reasons that a no-action letter does not provide complete protection for the recipient—and some reasons (beyond the resources required to make a request) that a requestor may not want to request one.
1. A No Action Letter Will Only Apply to the Bureau
A no-action letter will reflect the intention of the CFPB’s staff. It will not reflect the intention of any other agency—such as a bank regulator or a state attorney general—that may share authority with the CFPB to enforce the particular law at issue. Additionally, a no-action letter will not preclude a private lawsuit by an aggrieved consumer.
My personal prediction is that bank regulators will be hesitant to initiate an action if the CFPB staff has provided a no-action letter (assuming that the recipient is meeting the terms of the letter). State attorneys general are a more mercurial bunch, so it’s harder to predict whether a no-action letter would deter them. I have little doubt that a class action attorney would not refrain from bringing an otherwise promising lawsuit simply because the CFPB staff has issued a no-action letter.
Because the no-action letter will apply only to the CFPB, a potential requestor should consider whether a no-action letter will put a figurative target on its back. A no-action letter means that the CFPB staff has concluded that there is “substantial legal uncertainty” whether the product complies with a particular provision of law. A class action attorney or someone else may read this as confirmation that there is at least a reasonable argument to be made that the product violates the law.
2. The Bureau Can Change its Mind without Notice
A no-action letter will contain a statement that the CFPB staff has no “present” intention to recommend an enforcement action. The policy specifically warns that a no-action letter will be “subject to modification or revocation at any time at the discretion of the staff for any reason.” The CFPB gives the following examples of reasons that it may decide to modify or revoke a no-action letter:
- The facts and representations in the request appear to be materially inaccurate or uncertain;
- The requestor fails to satisfy conditions or violates limitations specified in the no-action letter;
- The product or any of its material features, terms or conditions is altered;
- The staff “determines that such modification or revocation is appropriate to protect consumers or is otherwise in the public interest.”
The first three of these examples are all in the control of the requestor. The final example is basically a highfalutin way of saying that the CFPB reserves the right to change its mind.
If the CFPB changes its mind, can the CFPB bring a retrospective enforcement action against the recipient? We doubt the CFPB will bring an enforcement action against a recipient that relied on the no-action letter in good faith and which adhered to the terms of the no-action letter. But if the CFPB revokes or modifies a no-action letter, the recipient may need to make significant changes to its business product on short notice.
“Unless there is a reason not to do so in a particular case,” the CFPB will notify the recipient before modifying or revoking the letter and give the recipient an opportunity to respond.”
Revocations and modifications of no-action letters will be public. Expect class action attorneys to carefully review all revocations, especially revocations and modifications based on the CFPB’s determination that the facts submitted were inaccurate or that the product feature has changed.
3. If Your Product Evolves, the Letter May Not Be Useful Anymore
New and innovative financial products often go through significant changes in their early stages. Developers gain enormous data in the early stages of a product’s life and may modify the product (sometimes significantly) in response to that data.
A no-action letter will be limited to the specific facts presented in the request. Thus, if you change your product in a way that is material to the CFPB’s no-action letter, then the no-action letter is (in the words of the policy) “by its own terms inapplicable (even without modification or revocation).” In this situation, “the staff may recommend initiating a retrospective enforcement or supervisory action if appropriate.”
This does not mean that a no-action letter is necessarily useless if your product may change in the future. Some changes to a product may not be material to the CFPB’s no-action determination. When preparing a request for a no-action letter, you should brainstorm all the possible ways your product may evolve and discuss them with the lawyers helping you to prepare the request. Your lawyers can help you to assess whether possible changes may be considered material.
4. Consider Whether Anything You Submit May Be Subject to Public Disclosure
The request for a no-action letter must include detailed information about the product and the requestor’s business plans with respect to the product. Much of the information that a requestor will be required to submit may be confidential or proprietary.
The policy says that a party requesting a no-action letter may request confidential treatment of certain information in the request. The policy says that disclosure of this information will be governed by the CFPB’s rules on disclosure of records and information. If your request does include financial information, you should discuss these rules with your lawyers carefully.
The CFPB should be commended for offering a mechanism to alleviate the legal uncertainty that often surrounds innovative products. This could be hugely beneficial to the payments industry. However, a no-action letter may not always be a panacea, and there are some situations where it may be affirmatively bad to request one. Companies considering whether to make a request should consult with legal counsel and consider the potential risks and rewards carefully.
David Beam recently joined Mayer Brown LLP as a partner in the Washington, D.C., office. He is a member of the firm’s financial services regulatory and enforcement group. David can be reached DBeam@mayerbrown.com.
In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore. This article is intended for general information purposes only and should not be construed as legal advice. Readers are urged not to act upon the information without first consulting an attorney.