A Symposium on 1073: Exploring the Final Remittance Transfer Rule and the Path Forward - September 6, 2012
Consumer Financial Protection Bureau's perspective
A representative from the Consumer Financial Protection Bureau (CFPB) started the symposium by providing an overview of the new remittance transfer rule, addressing common questions, and clarifying definitional ambiguities. The effective date of the rule remains February 7, 2013. The CFPB intends to monitor the impacts of the rule and welcomes market data and information in that regard.
Next steps for the CFPB include publishing the "safe harbor" list, identifying countries for which estimates may be provided, publishing a small business guide for complying with the rule, offering an educational webinar, and monitoring the market, including gathering data, to evaluate impacts of the rule.
Questions to the CFPB revolved around two primary concerns: 1) challenges in complying with the disclosure requirements due to lack of access to or availability of receiving-end tax and fee information, and 2) strict liability on the provider for sender error, including challenges in proving sender fraud. A suggestion was made for the government or private sector to develop a single, central database to house tax information that all remittance transfer providers can use. Many attendees supported this concept.
Impacts and consequences of the rule
Complying with the rule has been and will continue to be a massive undertaking at significant cost, time, and effort to remittance providers. Compliance efforts are well under way. However, the following challenges still exist:
- Significant system changes are required to achieve compliance with the disclosure requirements and other aspects of the rule. Year-end system freezes are leaving inadequate time to thoroughly test these changes, increasing the risk to successfully implementing technology solutions necessary to achieve compliance. Given the time required, some organizations will reduce the number of channels used for remittances until systems can be properly modified and tested.
- The absence of the availability of reliable tax and fee information coupled with the need to engage in significant contractual renegotiations with foreign counterparties will lead some providers to reduce the number of countries they serve.
- Strict liability for sender and downstream error will rest with the providers, prompting some organizations to manage risk by lowering caps on remittance amounts.
- Achieving compliance will be a significant cost to organizations. The ultimate result may be increased prices to consumers, at least in the short run.
Because of the expected reduction in channel availability and countries served, the use of caps on remittance amounts, and the potential for increased prices, many symposium attendees expressed concern that U.S. consumers will find alternative (and unprotected) ways to send money.
Implementation and compliance
The remittance transfer market is fragmented with no end-to-end control of remittances, even in a closed-loop business model. Remittance providers are approaching compliance from a global perspective. They are working to renegotiate agreements with counterparties in other countries, recognizing that indemnification and warranties will likely be off the table and that downstream parties with whom providers do not have a direct contractual relationship may not participate in a compliant way.
Providers with agent networks are training thousands of agents whose main business is not remittances (that is, gas stations, drug stores, and others). This training addresses the provision of disclosures, languages used to market, solicit and advertise to customers, resolving customer inquiries, and installing new equipment, along with other issues.
Providers are also preparing for increased fraud as a result of the strict liability on the provider for sender error. They are implementing resolution processes, changing caps on remittance amounts, and altering reporting and monitoring mechanisms.
Senders who rely on third-party software providers are finalizing business requirements with these providers, and planning cutovers with minimal testing time, given year-end freezes.
Issues with UCC Article 4A
The enactment of Section 1073 caused some difficulties about the way that Uniform Commercial Code (UCC) Article 4A applied to wire transfers. Prior to Dodd-Frank, Article 4A stated that a payment was not a wire transfer subject to Article 4A if any part of that payment was subject to the Electronic Funds Transfer Act (EFTA). Also before Dodd-Frank, EFTA stated that a consumer payment made by means of a wire transfer system was not an electronic funds transfer subject to the EFTA and Regulation E. Section 1073 disrupted this delineation of what EFTA covered and what Article 4A covered. Section 1073 brought consumer-initiated international wire transfers under the coverage of the EFTA, as amended by Dodd-Frank. After 1073, an international wire initiated by a consumer in the United States became a "remittance transfer" subject to the amended EFTA, and the legal consequence was that the entire series of bank-to-bank transfers that occur to complete the consumer-initiated wire were also taken out from under the structure of Article 4A. This was an undesirable legal result, because virtually all of the agreements among U.S. banks for handling international wire transfers assumed that the rights and obligations of the banks with respect to those transfers were defined by Article 4A.
Recognizing the uncertainty around which laws now govern the rights and responsibilities for the interbank piece of the remittance transfer, the industry and regulators have worked hard to provide fixes in Regulation J (which governs FedWire transfers) and the Clearing House Interbank Payments System(or CHIPS) rules. The fixes allow UCC 4A to continue to apply regardless of whether a funds transfer is also a remittance transfer governed by Section 919 of EFTA. New York's UCC has likewise been amended to provide that it applies to a fund transfer that is a remittance transfer, with a Uniform Law Commission recommendation that states adopt similar amendments. In the case of conflicts, EFTA would control. That said, it is not entirely clear what constitutes a conflict. The Bank Secrecy Act rules have a similar definitional cross-reference issue as Regulation J, CHIPS rules, and UCC 4A. The issue does not currently have a fix in place but is under review by the Federal Reserve and the U.S. Department of the Treasury's Financial Crimes Enforcement Network (or FinCEN).
The path forward
With remittance providers working hard and spending significant resources, time, and money to comply with the rule, basic compliance is expected by the February 7, 2013, deadline. However, with the planned reduction in channels and countries served and the potential for increased costs, the consumer experience may not be positively affected in all cases.
The suggestion for the government or private sector to develop a single, central database to house tax information that all remittance transfer providers can use was reiterated as a way to efficiently ensure consistent and accurate tax disclosures.
Education for all players will be important in achieving the goals of the rule. Consumers, for example, should be made aware both of their new right to cancel any remittance transaction within 30 minutes of providing payment and that they have provider contact information on their receipt in the event of any errors. At the same time, all remittance providers and their agents must be trained and educated to ensure compliance with this new rule.