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.)
