Articles Posted in Regulatory and Compliance

Background

In response to the financial crisis and recession in the United States that began in 2007, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (now commonly known as “Dodd-Frank”). Dodd-Frank created a vast array of new financial regulations, including the new and independent Bureau of Consumer Financial Protection designed to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws.”

Now known by its alphabet soup moniker, the CFPB has jurisdiction to enforce one of the simplest, yet most powerful, provisions in Dodd-Frank: “It shall be unlawful for any covered person or service provider to engage in any unfair, deceptive, or abusive act or practice.” These “unfair, deceptive, or abusive” acts or practices have become commonly known in the legal and financial industries as “UDAAPs.” The CFPB has not implemented formal rulemaking with respect to the prohibition on UDAAPs. Instead, it has made the conscious decision to largely implement its UDAAP rules via its enforcement actions and a series of guidance documents, including the “Supervision and Examination Manual,” which articulates CFPB’s expectations for how this law is to be enforced.

In previous posts (Proposed Changes to UK’s TUPE will impact outsourcing deals, The UK Government consults on proposed changes to the TUPE regulations) we highlighted the UK Government’s proposed changes to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE 2006“). The UK Government has now finalised these changes,

resulting in the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 (“Amended TUPE Regulations“). 

The Department for Business, Innovation and Skills (BIS) also published useful guidance which helps to explain the changes made to TUPE 2006.  Generally speaking, the Amended TUPE Regulations brought into effect the changes discussed in our previous post,

Procurement says SAS70;

Finance says SSAE 16;

Audit says SOC 2;

As many who have struggled to find a clear way to comply will know, an important change to the EU E-Privacy Directive (implemented by many EU states late 2011/2012) meant that, in summary, websites which target/monitor/profile Europeans have been obliged to seek consent to use cookies via an opt in mechanism. However, given each member state was left to its own devices to implement this change at a national level and given some fierce lobbying by business to try to avoid strict “I agree” mechanisms, this has meant that a range of approaches have been taken to what precisely constitutes opt in consent, with some regulators (e.g. the Dutch) taking a more literal interpretation of the Directive, whilst others (e.g. the English) taking a much more liberal approach.

This patchwork approach across Europe has caused serious headaches for those conducting e-business in multiple EU countries., A compliance mechanism could be acceptable for one country, only to be slapped down (or worse, risk a fine) in another.

In an attempt to clear up some of the confusing and often contradictory views, the Article 29 Working Party, a body made up of the EU’s data protection regulators, released a new guidance note on 14th October 2013.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) is in the spotlight as part of the UK Government’s Employment Law Review.  Launched in 2011, the purpose of the review is to reform employment law in order to achieve a fair, effective and flexible labour market in the UK[1].  The Government says that these reforms will support better relationships between workers and employers and are aimed at making evolutionary improvements to the labour market which will retain flexibility and dynamism and benefit individuals, employers and the economy.

TUPE implements the EU Acquired Rights Directive (“ARD”) in the United Kingdom.  It protects employees’ terms and conditions of employment when a business is transferred from one owner to another.  Where TUPE applies, there is an automatic transfer – for the affected employees it is as if their employment contracts had originally been made with the new employer, with their continuity of service and, subject to a few exceptions, other employment rights all preserved.

In an outsourcing context, TUPE will often apply because of the service provision change (“SPC”) rules. A SPC will usually occur where there is a change of service providers or a contracting in or out of services.  TUPE is complex and is viewed by many as overly bureaucratic, leaving little room for new employers to make post-transfer changes to an employee’s contract or to dismiss them fairly.  Critics say the SPC provisions, which were introduced in 2006, went beyond the requirements of the ARD- so called “gold plating.”  Taken in the round, the impact of TUPE, in its current formulation, may constrain the incoming service provider’s ability to restructure the inherited work practices, thereby impeding innovation and cost reduction.  TUPE has also spawned complex indemnity and post-contract verification provisions in outsourcing agreements, reflecting the additional complexity associated with personnel transfers. 

There are a number of important reforms being made to UK employment law this year, largely due to the enactment of the Enterprise and Regulatory Reform Act 2013 (“ERRA”). Many of the reforms under ERRA are being implemented over a period of time from 2013 and beyond, following a period of intensive consultation by the UK Government. Keeping track of all the proposed reforms can be a challenge. This Client Alert summarises the key reforms which have recently come into force and provides a timetable for the implementation of other key proposed reforms so that employers can start planning more effectively to accommodate the changes.

Today the European Commission unveiled its legislative package to adapt the EU payments market to the opportunities of the single market and to support EU economic growth . The package includes a proposal for a cap on multilateral interchange fees (MIFs) for card-based payment transactions. MIFs are set by credit-card companies and collected by banks each time a consumer makes a purchase on a card. Fees across Europe vary widely, from less than 0.2% in the Netherlands to more than 1.5% in Poland. In addition, surcharges on consumer debit and credit cards will be banned by the new Payment Services Directive (PSD2). Surcharges are the extra charge imposed by some merchants for payments by card and, according to the Commission, are common notably for purchases of airline tickets online. In 95% of cases, merchants will no longer be allowed to surcharge consumers for using payment cards, whether for domestic or cross-border payments. This measure alone is set to save consumers 730m euro each year. So called ‘three-party schemes’ such as American Express and Diners, as well as commercial cards issued to businesses, which together account for the remaining 5%, are not covered by the surcharging prohibition. Retailers will be able to surcharge for these cards or refuse to accept them.

Introducing the legislative package, Michel Barnier, Internal Market and Services Commissioner, said “…the proposed changes to interchange fees will remove an important barrier between national payment markets and finally put an end to the unjustified high level of these fees.” Vice President Joaquín Almunia added “…interchange fees paid by retailers end up on consumers’ bills. Not only are consumers generally unaware of this, they are even encouraged through reward systems to use the cards that provide their banks with the highest revenues… the regulation capping interchange fees will prevent excessive levels of these fees across the board.”

MIFs have long been under regulatory scrutiny, with laws adopted in the United States, Australia and other countries, and several EC decisions under EU competition laws including the 2007 MasterCard case. Although included in a merchant’s cost of receiving card payments, regulators are concerned that interchange fees are ultimately passed through to consumers through higher prices amounting to tens of billions of euros each year. With Visa and MasterCard’s market share estimated at 96.8% in value, and with interchange fees already banned in countries such as Denmark and the United States, the Commission believes that regulation is required. This is despite the MasterCard case, the proceedings against Visa Europe (which lead to undertakings for consumer debit cards in 2010 and consumer credit cards in 2013) and a rash of other national competition proceedings.

Although reconciliation of the key terms has been a best practice for over-the-counter derivative trades for some time (particularly with collateralised trades), the scale of the reconciliation exercise imposed by forthcoming regulations in the EU and U.S. has caused many market participants to undertake a fundamental review of the systems and processes in place. For many, compliance can only be achieved by utilising a third party for provision of an appropriate technology platform or an end-to-end service. With imminent compliance deadlines and the late development of the requirements themselves, functionality has understandably been the focus of any sourcing process. However, from a supply chain and outsourcing perspective, a key challenge remains the manner in which the financial services-specific regulations are applied to this type of third-party arrangement.

The New Legislation

With the 1 July deadline for compliance with CFTC Rule 23.502 looming and the equivalent EU legislation (in the form of the Commission Delegated Regulation (EU) No. 149/2013) due to come into force on 15 September, OTC market participants are bracing themselves for major changes to the way they perform portfolio reconciliation in relation to non-cleared trades. In fact, it is looking increasingly likely that the deadline will have to be extended by around three months, to allow further time for compliance by the affected institutions.