U.S. Financial Industry Developments

Federal Court Sends Colorado's Case Against Online Lending Platform Back to State Court

Colorado's ongoing challenge to the bank partnership model of online lending will next play out, at least in part, in state court.

Last year, the Administrator of Colorado's Uniform Consumer Credit Code filed suits in state court against two online lending platforms, Avant, Inc. and Marlette Funding LLC. The platforms facilitate, market, and service loans originated by two state-chartered banks - WebBank and Cross River Bank, which have filed their own actions seeking to enjoin the State's actions against the platforms. Colorado seeks civil penalties from the platforms, contending that the banks' role in the transactions is insufficient to preempt state lending statutes under federal banking law. In so arguing, Colorado relies on two cases: the Second Circuit's decision in Madden v. Midland Funding, LLC, which held that charged-off debt sold by a bank was not entitled to federal preemption; and the West Virginia Supreme Court of Appeals' decision in Cashcall, Inc. v. Morrisey, which held that a loan's true lender is the party with the "predominant economic interest."

To read the full alert, click here.

GAO Report Finds Regulators Could Take Further Steps to Better Protect Fintech Consumers

In a report released March 22, 2018, the U.S. Government Accountability Office ("GAO") explained that existing laws and regulations may not be adequate to mitigate the risks posed by the increasingly widespread usage of fintech products and services. The report, which was prepared in response to a request from Congress, covers four major fintech product and service areas—payments, lending, wealth management, and distributed ledger technology.

In its report, GAO made numerous recommendations to regulators with the hope of "improving interagency coordination on fintech, addressing competing concerns on financial account aggregation, and evaluating whether it would be feasible and beneficial to adopt regulatory approaches similar to those undertaken [abroad]."

Click here to read the full report and here to read the highlights.

European Financial Industry Developments

ECB Finalizes Guides on Bank and Fintech Bank Licensing

On March 23, 2018, the European Central Bank ("ECB") published the final versions of its:

• Guide to assessments of license applications, available here. This sets out the general process and the requirements for the assessment of credit institution licensing applications. It applies to all license applications to become a credit institution within the meaning of the Capital Requirements Regulation (Regulation 575/2013) ("CRR"), including initial authorizations for credit institutions, applications from Fintech companies, authorizations in the context of mergers or acquisitions, bridge bank applications and license extensions.
• Guide to assessments of Fintech credit institution license applications, available here. This is directed at entities with a Fintech business model that are considering applying for a banking license.

The guides are not legally binding. Instead, their aim is to support applicants and all entities involved in the process of authorization to ensure a smooth and effective procedure and assessment.

Responses were received from, among others, UK Finance, the European Savings and Retail Banking Group ("ESRBG") and the Association of Financial Markets in Europe ("AFME"). Most respondents supported the goal of achieving maximum transparency in the license application process and raising greater awareness of the procedure followed and criteria applied by the ECB in its assessment of license applications. With respect to the guide relating to Fintech credit institutions, there was also strong support for the ECB's aim of upholding the same supervisory standards for all credit institutions and ensuring a technology-neutral approach to assessing license applications. Both guides have been amended in response to the comments received.

ESMA Speech on Brexit, Transaction Cost Transparency and Review of ESAs

On March 21, 2018, the European Securities and Markets Authority ("ESMA") published a speech by Steven Maijoor, ESMA Chair, on, among other things, supervisory convergence in the context of Brexit, transaction cost transparency and the review of the European Supervisory Authorities ("ESAs") (that is, ESMA, EIOPA and the EBA). The speech is available here.

Points of interest in the speech include:

• Supervisory convergence. While financial centres in the EU27 should be free to compete based on the strengths they can offer firms relocating from the UK as a result of Brexit, the EU rulebook should always be applied consistently. Regulatory or supervisory arbitrage should not feature in firms' contingency plans. ESMA does not wish to question or undermine the delegation model under the Alternative Investment Fund Managers Directive (2011/61/EU) ("AIFMD"). Instead, it seeks to avoid the creation of "letterbox entities" (whereby an alternative investment fund manager ("AIFM") delegates its functions to the extent that, in essence, it is no longer the manager of the relevant alternative investment fund (AIF)). To mitigate the risks to supervisory convergence from Brexit, ESMA has created the Supervisory Coordination Network ("SCN").
• Transaction cost transparency. In Mr. Maijoor's view, the changes to cost transparency introduced by MiFID II (that is, the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) ("MiFIR")) and the Regulation on key information documents (or "KIDs") for packaged retail and insurance-based investment products ("PRIIPs") (Regulation 1286/2014)) are already having a positive impact. For example, the new model of payments for research should help ensure better use of firms' research budgets, while the KIDs have given investors a complete picture of the costs of the investment product they are buying. ESMA notes the concerns that have been expressed in relation to negative transaction cost figures, but in the absence of evidence to the contrary, believes that these should be extremely rare and that the methodology is sound.
• Review of the ESAs. Mr. Maijoor expresses confidence that ESMA would be able to deploy the proposed new convergence powers on delegation arrangements efficiently and proportionately. For example, ESMA has used the opinion tool to ensure consistency in the granting of pre-trade transparency waivers to trading venues. Under the proposed new funding model, ESMA would be able to expand its supervisory convergence activities, which would ultimately help to advance the capital markets union ("CMU") project.