John D. Wright, of Wells Fargo & Company, just finished giving his thoughts about the Dodd-Frank Act’s new “abusive” standard. Section 1031 of the Dodd-Frank Act vests the newly created Bureau of Consumer Financial Protection with the authority to take enforcement action against banks and other covered entities from engaging in unfair, deceptive or abusive practices. Mr. Wright highlighted § 1031(d), which defines the abusive standard, claiming that the standard introduces “radically new concepts regarding the customer’s understanding of banking products, the customer’s suitability for a banking product, and the bank’s duty to act in the interests of the consumer.”
Mr. Wright pointed out that a lack of clarity in the statute’s language and guidance from regulators makes for muddy waters for large banks future interactions with customers. First, the wording of § 1031(d)(2)(A) seems to require banks to determine each customer’s “financial literacy” to a previously unknown degree. Furthermore, banks will require further clarification as to whether the standard the Bureau will apply is that of a reasonable consumer or a particular consumer. Second, § 1031(d)(2)(B) may require that a bank determine whether a particular customer is suitable for a financial product, regardless of whether there was clear and conspicuous disclosure of product terms, even if the customer understands it. Finally, § 1031(d)(2)(C) may create a legal duty to act in their customers best interest, beyond their normal trust or investment advisory settings.
For more, please view Mr. Wright’s paper here.