Payments 3.0: Start Thinking About Consumer Protection

The battle over the role—and even the existence—of the Consumer Financial Protection Bureau will heat up this fall, but the future of the Bureau, and of financial regulations, will hang in the balance for a few years.

The financial-services industry may applaud the recent pushback against the regulators, but this could leave the business in a realm of regulatory uncertainty that could hinder both regulation and business development.

In the “Community Financial Services Association of America v. Consumer Financial Protection Bureau” decision, the Fifth Circuit vacated the Bureau’s 2017 Payday Lending Rule because the Bureau’s funding method was unconstitutional. But the court said the Payday Lending Rule itself rests on solid legal grounds. The Supreme Court agreed in February to add the Bureau’s appeal of this decision to its docket for October 2023.

The Fifth Circuit decision suggests the Supreme Court is unlikely to simply dissolve the Bureau, and is instead more likely to address the question of the Bureau’s funding. If its decision changes the status quo, then the future of consumer protection, and of the Bureau, will be even less settled, since Congress would need to resolve the funding question.

The 2024 elections will determine the future shape of the Bureau, but there is a catch. Given the divisive nature of politics, it is unlikely that any major change will come unless one party controls both houses of Congress and the presidency.

If the Republicans sweep the elections, they will require the Bureau to receive its money through the Congressional appropriations process and will change the structure of the Bureau from a single director to a board. From a political perspective, they do not want to be known as the party that voted against
consumer protection.

If the Democrats win, they will probably keep the current single-director structure and be guided by whatever parameters the Supreme Court lays out in its funding decision. But you can bet any Democratic bill will make the Bureau’s funding as independent as possible.

In the case of a divided Congress, or a united Congress with a president from the opposite party, any meaningful bill will likely be obstructed by the opposition party or get lost in partisan fights around other priorities.

This is problematic because federal regulations are not the only consideration when it comes to consumer protection. Various states could decide to try to fill perceived gaps, leading to a patchwork of regulations across the country.

Beyond that, good old-fashioned contract law can matter just as much as federal regs.  As one industry lawyer once explained to me, an account agreement is essentially a contract with the customer. So even if regulations have changed or been vacated by the court, providers cannot arbitrarily stop providing protections that were in the account agreement when a product was issued to a customer.

This explains why, even though the final Prepaid Accounts rule went into effect roughly six years after it was first proposed, providers still needed to destroy a large amount of unsold cards, cardholder agreements, and marketing collateral that did not keep up with all the iterations and changes.

The industry sometimes argues it can regulate itself in conjunction with the market. It might find itself in that situation, at least for a brief time. Companies should begin thinking about what consumer-protection policies they have and how they will explain those policies to stakeholders, including customers, business partners, and even courts. And the industry might want to consider coming together on best practices around consumer protection to reduce reputational and legal risks— even if regulatory risks subside.

—Ben Jackson bjackson@ipa.org