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A Look Ahead at the Ever-Changing FinTech and FinReg Landscape

Product innovations continue to shape the way financial services and technology companies, regulators, and consumers interact with one another. In this article, partner Mercedes Tunstall explores what’s next for her industry and what makes her practice unique.

Mercedes Kelley Tunstall, a former Federal Trade Commission (FTC) lawyer, is widely recognized as a legal leader in fintech and consumer financial services regulation and compliance. She works with companies in a variety of industries on advertising law and privacy and cybersecurity issues. She regularly counsels clients regarding federal banking regulators and defends clients against enforcement actions taken by these regulators, particularly the Consumer Financial Protection Bureau (CFPB). 

What are the major trends you’re watching?

In June 2020, the U.S. Supreme Court ruled that the current structure of the CFPB is unconstitutional. The decision means that CFPB can continue its mission, but the president of the United States is now free to fire the CFPB director at any time, without cause. In light of this ruling, I expect to see regulatory uncertainty from the CFPB until the next election. For example, the CFPB had been expected to complete a final rule on the Fair Debt Collection Practices Act prior to the election, but has apparently decided not to move forward with it.

What are one or two developments in this space that you think are going to have the biggest impact in the next three to five years?

The direction we go really depends on the next election. If we continue with the current administration, it seems likely that the extent of federal involvement in consumer financial services and banking regulation generally will be diminished. If there is an administration change, I expect that the CFPB will be reinvigorated and expand its rulemaking and enforcement activities. This means that all financial services companies will need to review their risk assessments and most likely reduce the tolerance of risk across the board, but specifically in areas of compliance and operational risk.

Whenever we begin to come out of the pandemic, there will be a great need for alternative credit models. Traditional FICO models will no longer work because broad swathes of the population, who previously had great FICO scores, have found themselves unemployed and unable to pay their bills due to widespread shutdowns of various kinds of businesses. While people get laid off, experience death in the family or have severe illnesses in the normal course of events, and experience a reduction in their FICO score when they struggle with bills, the sheer number of individuals impacted by the pandemic in this way means that new ways of assessing credit risk will be ever more relevant. Even prior to the pandemic, the FICO score was already becoming less useful in predicting the credit risk of an individual over time, and now more than ever, it seems like significant changes need to be made in how we determine credit risks over the next three to five years as we recover from the pandemic. If financial services companies move away from the FICO score in large numbers, then that change will mean that regulators will need to be educated on the alternative credit risk models to ensure that they understand how to properly assess the risk a financial institution takes when extending credit.

What makes Loeb a leader in this space?

We have a great relationship with consumer-facing companies, which enables us to keep our fingers on the pulse of what these companies offer their consumers and what their true needs are. Larger banks often focus on innovating financial services products without truly understanding consumers’ interests and purchasing behaviors. Our perspective is unique in that we are ahead of these trends, which allows us to assist our clients in identifying good financial services partners as well as innovation priorities.

What makes your practice unique and different?

My previous positions as an FTC lawyer and in-house counsel at Bank of America have given me a unique perspective that is grounded in the concerns of regulators. In addition, I have focused on technology for my entire career. As a result, I have gained knowledge on why certain financial services technologies have developed in the ways that they have. So not only am I familiar with the way regulators think, but I also have a deep understanding of technology-related concerns, including privacy and security issues. This combination of regulatory and technology-based knowledge uniquely positions me to address new financial products and services from a holistic viewpoint. In addition, my clientele is unique in that it includes not only financial technology startups, but also major banks and consumer-facing companies that want to establish customized financial services offerings rooted in technology. For example, some of my clients may not have a true financial services focus, but they have developed technology that can be used in a financial services context. As such, my practice caters to and impacts a wide variety of clients.

Do you think the measures taken in response to COVID-19 will have significant/lasting regulatory impacts or challenges?

COVID-19 has had a dramatic impact on the U.S. and world economies, and the effects of the pandemic will be with us for a very long time. We are still uncertain as to how long the pandemic will continue, which makes it difficult to predict what this means for the regulatory landscape and what financial services companies will have to do to change and adapt as we begin to recover.

Technology is redefining the financial services sector and the ways in which organizations interact with their clients and customers. How do you strike a balance between encouraging clients to implement new technologies while at the same time minimizing associated risks? 

One of the first questions I ask each client is “Why are you so interested in using a new technology?” What I’m looking to identify is whether there actually is a problem that needs to be solved with new technology, or whether they are interested in pursuing a new technology because it’s trendy. While new technologies can be very powerful, they can also be confusing for consumers to understand and therefore carry with them increased risks. Existing solutions, while they may not be as “sexy,” often carry less risk and can be easier to implement and be more effective.

What changes have you seen in the regulatory landscape to keep up with new technologies? 

Regulators have come to understand that innovation in the financial services industry is here to stay. All of the federal banking regulators have established offices of innovation, which are staffed with regulators who have either been in the industry or have strong technology backgrounds. These types of offices allow regulators to establish enforcement priorities and identify ways in which laws need to change to keep up with new technologies.