By Roy Urrico
On June 5, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule outlining the qualifications to become a recognized industry standard-setting body, to help companies comply with the CFPB’s upcoming Personal Financial Data Rights Rule. The CFPB expects to allow companies to use technical standards developed by these standard-setting organizations (recognized by the CFPB) to accelerate the shift to open banking in the U.S.
The rule identifies the attributes that standard-setting bodies must demonstrate. It also includes a step-by-step guide for applying to become standard setters and how the CFPB will evaluate applications.
“Industry standards can be weaponized by dominant firms in order to maintain their market position, undermining competition for all,” said CFPB Director Rohit Chopra. “Today’s rule will prevent these firms from rigging standards in their favor by identifying attributes the CFPB will use to recognize standard setters.”
Advancing the Shift to Open Banking
In October 2023, the CFPB proposed the Personal Financial Data Rights Rule to implement these rights that the CFPB proposes to finalize in the coming months. As part of the upcoming Personal Financial Data Rights Rule, the CFPB explained, it expects to allow companies to use technical standards developed by standard-setting organizations recognized by the CFPB.
The June 5 Rule kicks off the process for standard-setting organizations to seek formal recognition by identifying attributes standard setters must demonstrate for CFPB recognition. Organizations must display the following attributes:
Openness: The CFPB said it will not recognize any standard-setting organization “rigged” in favor of any set of industry players. The process must be open to all interested parties, including public interest groups, app developers, and a broad range of financial firms with a stake in open banking.
Transparency: Procedures must be transparent to participants and publicly available.
Balanced decision-making: The decision-making standard-setting power must demonstrate balance across all interested parties, including consumer and other public interest groups. There must also be meaningful representation for large and small commercial entities. No single special interest can dominate the decision-making process.
Consensus: Standards development must proceed by consensus, though not necessarily unanimity. Comments and objections must utilize fair and impartial processes.
Due process and appeals: The standard-setting body must use documented and publicly available policies and procedures, provide adequate notice of meetings, sufficient time to review drafts and prepare views and objections, access to views and objections of other participants, and a fair and impartial process for resolving conflicting views. An appeals process is also available for the impartial handling of procedural appeals.
The new Rule also includes a mechanism for the CFPB to revoke the recognition of standard setters and a maximum recognition duration of five years, after which recognized standard setters will have to apply for re-recognition. The rule also contains a step-by-step guide to help interested standard setters apply for recognition. The guide describes five steps in the application and recognition process, and the CFPB invites interested standard setters to begin engaging with us when they are ready to demonstrate their adherence to the attributes the CFPB codified today.
An Ongoing Process
The CFPB reiterated that this is its latest step toward accelerating the shift to open banking in the U.S. That process began in 2010 when Congress passed into law new personal financial data rights for consumers. However, these new rights have not taken full effect, because the CFPB never issued a rule. The Bureau maintained guaranteeing a consumer’s right to their data will open more opportunities for smaller financial institutions and startups offering products and services.
In March at the Financial Data Exchange (FDX) Spring Global Summit 2024, Chopra discussed the status of CFPB’s position on accelerating America’s shift to open banking.
“All of you in this room know that the United States has a clunky system when it comes to switching financial products. Moving to a new checking account with a better interest rate involves resetting direct deposits and recurring bill-paying, printing new checks, and obtaining a new card device,” he said. “Mistakes can be costly. It’s no surprise that the largest banks in the country have barely budged on their rates, but still retain their depositor base.”
Chopra noted, “Open banking involves less red tape and more seamless switching.” In his presentation, he referred to the CFPB proposed rules announced on Oct. 19, 2023 that would serve as a key foundation in the shift to open banking.
The proposed rules would allow consumers to have control over data about their financial lives and would gain new protections against companies misusing their data. Chopra said, “We are in the process of finalizing these rules, by reviewing feedback to our proposal, coordinating with our sister components within the Federal Reserve System, and thinking through enforcement with other financial regulators.”