Personal Financial Data Rights Rule: Strategies for Financial Institutions

Financial institutions are vulnerable to the complex and dynamic regulatory landscape. Forty-two percent of organizations cited facing regulatory issues and compliance changes within the next 2-5 years as a top challenge. Financial institutions must be adaptable and remain informed on the latest industry regulations to operate effectively.

An example is the new Personal Financial Data Rights rule (PDFR) the Consumer Financial Protection Bureau (CFPB) proposed on Oct. 19, 2023. The proposed rule is the first application to implement Section 1033 of the Consumer Financial Protection Act, which charged the CFPB with implementing personal financial data sharing standards and protections. The CFPB expects to cover additional products and services in future rulemaking.

Currently in its notice-and-comment period, which will end on Dec. 29, 2023, the proposed rule would require depository and nondepository entities to:

  • Make some data regarding consumer transactions and accounts available to consumers and authorized third parties.
  • Establish obligations for third parties accessing a consumer’s data, including important privacy protections.
  • Provide basic standards for data access.
  • Promote fair, open and inclusive industry standards.

The requirements would be implemented in phases, with larger providers being subject to them much sooner than smaller ones. Community banks and credit unions with no digital interface with their customers would be exempt from the rule’s requirements.

If approved, this will profoundly change how financial institutions handle consumer’s financial data and present compliance challenges. Financial institutions failing to comply with the proposed PFDR rule could face legal ramifications such as civil penalties, cease-and-desist orders, reputational damage and consumer and data breach lawsuits. Specific legal implications will depend on the nature of the violation, consumer damage and relevant laws and regulations in effect at the time.

Although the PFDR is still in the proposal phase and subject to change, it’s key for financial institutions to take steps to minimize risks.

Here are some strategies to consider in preparation:

Focus on Compliance

To increase compliance, carefully review the PFDR rule and its requirements. Be sure to examine crucial areas such as data access rights, data use restrictions, data security standards and covered data. Review your current procedures and practices to determine which ones may not comply. Then develop a thorough implementation plan defining the actions to achieve compliance. This includes timelines, communication strategies and resource allocation.

Take a Proactive Approach to Data Management

Thoroughly evaluate any third-party service providers and vendors who access your customer data to ensure they comply with the PFDR rule’s data security and privacy requirements. In addition, clarify data access rights in user agreements and contracts with those parties. To limit third parties’ use and disclosure of data, apply contractual provisions.

Additionally, boost your data security by applying robust cybersecurity actions. This will protect your customer data from unauthorized misuse and breaches. In a breach, be prepared with a well-defined incident response plan.

Build Consumer Trust

It’s imperative to communicate with your customers about what the rule is and what their data rights are, along with providing educational materials and other resources. To make certain your customers understand and approve how their data will be used and shared, provide detailed consent procedures.

Restrict authorized third-party data usage by creating firm policies and verifying that the data will only be used for authorized purposes and not shared or sold without consent. Finally, employ effective processes for responding to customer complaints and inquiries concerning security and data access.

Seek Legal Counsel

Consulting with legal counsel with expertise in the financial services industry will help you navigate the PFDR rule complexities and ensure compliance. The specific legal approach will depend on your financial institution’s unique circumstances.

Skilled legal counsel can address your concerns and increase compliance by:

  • Keeping you informed on developing regulations and providing guidance through existing changes to data procedures.
  • Providing guidance on how to comply with the rule while evaluating consumer privacy and data security concerns.
  • Addressing potential legal issues swiftly and effectively to mitigate risks.
  • Handling litigation risks and guarding against potential lawsuits.

In summary, although the PFDR rule is still in its final development stages and it’s feasible that regulations may evolve, prepare by staying informed and adapting your strategies accordingly.

By investing in legal counsel early on, you can leverage the expertise of professionals to mitigate risks, prevent costly mistakes and take advantage of the opportunities presented by this new regulatory landscape. For legal inquiries, please contact us at Pastore LLC.

This article is intended for informational purposes and does not constitute legal advice.

(Julie D. Blake, JD, LLM, CIPP, CIPM, is an experienced commercial litigator and data privacy expert with expertise in cybersecurity, data privacy breaches, risk assessment and data privacy policy review.)

Preparing for the Impending AI Regulations: A Legal View

Due to artificial intelligence’s (AI) significant impact on business operations, companies must stay informed on evolving data privacy and transparency regulations. Recent research shows a steady increase in global AI adoption, with 35% of companies incorporating AI into their operations and another 42% considering it. Furthermore, 44% of organizations strive to integrate AI into their existing applications and processes.

Discover how to start preparing for forthcoming AI regulations that will govern the ethical use of this technology. This will help avoid problems like legal issues, fines, damaged reputation and loss of customer trust.

On Oct. 30, 2023, the White House issued an executive order to manage AI risks and expanded on the voluntary AI Risk Management Framework released in January 2023. The directive aims to ensure the safe, responsible and fair development and use of AI. Federal authorities will evaluate AI-related threats and provide guidelines for businesses in specific industries according to the following timeline:

  • Within 150 days of the date of the order: A public report will be issued on best practices for financial institutions to manage AI-specific cybersecurity risks.
  • Within 180 days of the date of the order: The AI Risk Management Framework, NIST AI 100-1, along with other appropriate security guidance, will be integrated into pertinent safety and security guidelines for use by critical infrastructure owners and operators.
  • Within 240 days of the completion of the guidelines: The Federal Government will develop and take steps to mandate such guidelines, or appropriate portions, through regulatory or other appropriate action. Also, consider whether to mandate guidance through regulatory action in authority and responsibility.

The Office of Management and Budget (OMB) released a new draft policy on Nov. 3, 2023. The policy is seeking feedback on the use of AI in government agencies. This guidance establishes rules for AI in government agencies. It also promotes responsible AI development and improves transparency. Additionally, it safeguards federal employees and manages the risks associated with AI use by the government.

Here are some approaches to consider when planning for the impending AI regulations:

Stay Well Informed  

Constantly monitor the development of AI regulations at the local, national and international levels. Examine which regulations directly impact your company’s use of AI. Consult with legal counsel specializing in AI and technology law to thoroughly understand how it will affect your company. Also, become acquainted with core legal principles rooted in AI regulations.

Conduct a Risk Assessment

A risk assessment is crucial for compliance and reducing legal liability, especially with emerging AI regulations. Begin by analyzing your AI systems for possible violations of existing laws and regulations, including consumer protection, anti-discrimination and data privacy.

Since AI systems gather and process large quantities of personal data, data protection and privacy are concerns. Companies should assess whether their AI systems comply with applicable data protection laws, such as the California Consumer Privacy Act (CCPA).

Regarding anti-discrimination, companies should assess whether their AI systems are unbiased and initiate measures to mitigate any probable biases. Finally, create plans for any uncovered legal risks.

Create a Powerful Infrastructure

Determine whether existing procedures and policies sufficiently tackle AI development, deployment and usage. Make certain the right contractual agreements are in place with technology vendors, data providers and other stakeholders.

In compliance with pertinent data privacy regulations, create strong data governance procedures for collecting, storing and using personal data. Regularly monitor and audit AI systems to detect legal compliance issues. Lastly, develop a thorough plan for responding to potential legal events such as data breaches.

Partner with Legal Experts

A team of legal experts specializing in AI can help ensure that legal considerations are incorporated throughout the development and deployment process. Companies can lower their legal risk by partnering with an external legal counsel specializing in corporate AI and other technology areas, including cybersecurity.

In conclusion, addressing the legal aspects of AI improves compliance, and builds trust and confidence with stakeholders. Is your company legally protected in the AI-driven arena? For legal inquiries, please contact us at Pastore LLC.

This article is intended for informational purposes and does not constitute legal advice.

(Joseph M. Pastore III is chairman of Pastore, and focuses his practice on the financial services and technology industries, representing major multinational companies in state and federal courts, as well as before self-regulatory organizations such as FINRA, and government agencies such as the SEC.)

(Julie D. Blake, JD, LLM, CIPP, CIPM, is an experienced commercial litigator and data privacy expert with expertise in cybersecurity, data privacy breaches, risk assessment and data privacy policy review.)