Compliance Article
07/29/2008
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Overview
Virtually everyone these days has heard of Internet banking and many people have access to their personal and commercial bank accounts online. The financial services market requires a web presence. The Internet services provided by a financial institution online can range from a simple informational web site that lists products and services offered at the institution but has no interactive capability to the transactional type of web site that allows a user to open – and in some cases even fund – new accounts, review balances, transfer funds, and pay bills online.
As with many technological advances, Internet banking can lead to a new set of compliance issues and risks. Some of you may recall the confusing journey electronic communications has made in the past from a regulatory perspective. The Federal Reserve Board has attempted to end this confusion by providing amendments to several key consumer regulations affecting how financial institutions provide electronic disclosures. With these challenges and new rules, now is a great time to review your financial institution’s web site disclosures to determine if they are meeting the new rules and matching your internal processes and policies.
Statutory and Regulatory Requirements
Generally, the same federal regulations apply whether the consumer is opening an account electronically or via paper at a branch. This means the core group of disclosures are the same, however there are some unique considerations to keep in mind for electronic transactions. Also, keep in mind that many of your Internet banking customers will still use other bank delivery channels for disclosures and transactions. To that end, banks should review disclosures considering all possible delivery channels together to ensure consistency.
Let us review the federal regulatory disclosure requirements as they relate to electronic communications and Internet banking from the perspective of a transactional online account opening web site.
Regulation E
The primary purpose of Regulation E is to protect consumers who engage in electronic funds transfers (EFTs). Reg E requires a multitude of initial and periodic disclosures, including the types of EFTs a consumer can make, the financial institutions error resolution policy, and the liability for unauthorized EFTs.
Reg E generally does permit the use of electronic communications for disclosures with consumers. In 2007, the Federal Reserve adopted interim rules that had been proposed in 2001 clarifying electronic disclosure provisions. These rules allow a financial institution to use an electronic means of providing disclosures so long as the disclosures are either sent to the electronic address that was provided by the consumer or the financial institution makes such disclosures available at some other electronic location, such as a web site. If the disclosures are made available electronically, they should remain available for at least 90 days from the date of disclosure or the date of the notice that the disclosure is available.
Electronic Signatures in Global and National Commerce Act (ESIGN)
ESIGN provides a structure around electronic transactions, including enabling the use of electronic signatures and records for such items as signature cards and account terms as well as any disclosure requirements. There are some key requirements if a financial institution is going to do business electronically with consumers:
- The signer must intend the signature to have the same force and effect as a wet signature.
- The signature must be verifiable as belonging to the user.
- The signature must be attached or linked to the document in a way that authenticates the integrity of the electronic signature and document contents.
The consumer must agree to do business electronically, agree to the contract terms, and agree that they have read and received the disclosures and account agreement. Utilizing a document up front that acknowledges the signers intentions and lists the documents the signatures are effective for can be one possible method for meeting the requirements of ESIGN. Consider including such a document on your web site to take advantage of the provisions of ESIGN.
Regulation CC
Regulation CC requires financial institutions to provide customers with information on when funds will be made available for use in transaction accounts. Disclosures under Reg CC, must be given in a clear and conspicuous manner, must be in writing, and in most cases, must be in a form the customer may keep. They must also be given before opening a new account. Thus, if a financial institution provides customers with the ability to open accounts online, a Reg CC disclosure should be included as part of the Internet banking compliance program.
A common error of Reg CC compliance occurs when a financial institution’s funds availability policy or practice is not consistent with its disclosure document. If you are creating or updating your web site disclosures, now is a good time to verify that what you say you do is actually what you do and that what you do conforms to the regulation.
Privacy
Financial institutions must provide correct, clear, and conspicuous initial disclosures to new customers about their privacy policy. See 12 CFR 40 (OCC); 12 CFR 216 (FRB); 12 CFR 332 (FDIC); 12 CFR 573 (OTS). This disclosure must be provided either at the time the consumer relationship is established or before the bank discloses any nonpublic personal information about the consumer to any nonaffiliated third party.
Online privacy disclosures provided at account opening should include:
- The type of information to be collected;
- The type of information the institution may release;
- Information on how “nonpublic personal information” is shared between affiliates and nonaffiliates; and
- A consumer opt-out option for part of the information sharing, if applicable.
FACT ACT Update: In October, 2007, final regulations were implemented affecting the use of information by affiliates in marketing solicitation purposes and requiring a consumer notice and opt-out option. These regulations also provided model language in situations where a financial institution shares information with affiliates for marketing purposes. For more information on the affiliate marketing rule read New Affiliate Marketing Notices Coming in 2008.
Regulation DD: Truth in Savings (Reg DD)
The purpose of Reg DD is to “enable consumers to make informed decisions about accounts at depository institutions” and it “requires depository institutions to provide disclosures so that consumers can make meaningful comparisons among depository institutions.” In an effort to provide more clarity around the use of electronic disclosures, the Federal Reserve Board issued amendments to certain financial regulations in November 2007. The Reg DD final rules specifically require customer consent (with a few exceptions) to receive electronic disclosures relating to account-opening, periodic statements, and change-in-term notices. The final rules were effective December 10, 2007, with a mandatory compliance date of October 1, 2008. The new rules may require your financial institution to update your Reg DD disclosure.
Consistency and Clarity
The rules are no different for Internet banking disclosures as they are for your paper compliance disclosures: The guideline of consistency and clarity is a good rule of thumb:
- Be sure online disclosures meet the regulatory requirements.
- Be sure online disclosures match your programs and policies.
- Be sure online disclosures are consistent with printed disclosures.
Wolters Kluwer Financial Services has a range of disclosure documents and software solutions that can assist in meeting your financial institution’s online needs. Our Deposit Disclosure/Account Information Brochure for consumers consolidates various regulatory disclosures into a single document.
