What does Section 1073 say?
Section 1073 of the legislative provisions comprising the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) (see 'related links' below) provides for the regulation of cross-border electronic transfer payments originated by United States (US) consumers and is aimed at enhancing transparency over the terms of international payments for such persons. This is achieved by mandating that US based remittance transfer providers that send more than a de minimis amount of transfers abide by certain disclosure requirements. The relevant amount for these purposes is less than 100 consumer-initiated international electronic transfers in the prior and in the current years1. Under Section 1073, any providers that fall within its scope, including money transfer businesses, US depository financial institutions, broker-dealers and US based subsidiaries of foreign banks (Section 1073 Providers), must have knowledge of the exact costs and terms applicable to cross-border consumer initiated payments. The costs and terms may include charges imposed by the tax authorities, payment service providers, intermediaries and clearing and settlement mechanisms (CSMs) outside the US - i.e. including in Europe.
Section 1073 does not stop at imposing disclosure obligations - it also ties in any deviation from such obligations to liability for the Section 1073 Provider, including its affiliates, agents or delegates. Section 1073 also outlines rights and obligations in respect of cancellations and errors. Accordingly, it enables a US consumer to cancel any payment within 30 minutes, obligating the Section 1073 Provider to refund such consumer within three business days of a cancellation request for all relevant amounts. In addition, US consumers are afforded up to 180 days to claim an error relating to the amount or to delayed receipt / non-receipt of the funds (from the date when the availability of funds was disclosed to them). Section 1073 Providers have up to 90 days to investigate an error and upon conclusion of such investigation, three days to notify the US consumer of their conclusions and of any relevant remedies.
What is the scope of Section 1073?
Section 1073 applies to international electronic payments in any currency where the payer is a US natural person. Conversely, the identity of the beneficiary / recipient of the payment is not significant; the beneficiary can be a corporate entity, as well as an individual. From a territorial perspective, the funding account must be located in the US and the payment must be international in nature (i.e. the recipient account must be outside of the US). The payment must be for personal, family or household use; corporate payments are therefore out of scope. It is worth noting that the term account is broadly defined and includes payroll card accounts, namely accounts that are directly or indirectly established through an employer and to which electronic fund transfers of the consumer's salary or other employee compensations are made on a recurring basis (irrespective of who operates or manages the account in question).
Only payments exceeding USD $15 are caught by Section 1073. Payments conducted via wire transfer, including SWIFT (Society for Worldwide Interbank Financial Telecommunication), as well as automated clearing house (ACH) payments, online bill payments and even prepaid card payments are in scope, provided that they meet the remainder of the Section 1073 criteria. Furthermore, it does not matter in what currency the payment is denominated. Section 1073 clarifies that the term 'electronic funds transfer' does not include, inter alia, transfers of funds through Fedwire or similar systems used primarily for transfers between financial institutions or between businesses, certain securities and commodities transfers and telephone initiated transfers.
It is also worth noting that there are certain exemptions from the disclosure requirements. Specifically:
- The temporary exemption for US government insured depository financial institutions (valid until 21 July 2015) permits the use of estimates where exact amounts for disclosure purposes are not known for reasons beyond the sending institution's control. This exemption may be used in respect of information relating to the exchange rate, the amount transferred, fees and taxes as well as the total sum to be received. Notably, the exemption does not apply where the fees or foreign exchange (FX) conversion amounts are charged by a foreign bank that has a correspondent relationship with the Section 1073 Provider; as this is usually the case, the exemption will not be frequently relied on in practice.
- The permanent exemption allows Section 1073 Providers to estimate the FX rates and any relevant amounts in certain circumstances, i.e. where the transfer in question is to a country that has in place foreign currency control laws that prevent the Section 1073 Provider from being able to obtain the relevant information at the time of having to comply with its disclosure obligations2 or in respect of certain international ACH services offered by Federal Reserve Banks3.
What has to be disclosed to the consumer?
Under Section 1073, a US consumer needs to obtain information in two stages: (a) as part of the 'prepayment disclosure'; and (b) pursuant to the 'receipt disclosure'. The information in question must be clear and readily understandable, in writing and in a form that the consumer may retain. Section 1073 provides that the consumer may be provided with the disclosure information in electronic format, subject to the US consumer consent and electronic signature regulations.
- The prepayment disclosure should include the relevant amount that is being transferred, any applicable fees and taxes charged on such amount by the Section 1073 Provider, the full FX rate applicable (where currency conversion is relevant), all fees charged by all banks in the payment chain that are either deducted or charged to the beneficiary, all taxes that are to be applied on the payment and the total amount that is to be received by the beneficiary in the applicable currency. All this information must be provided to the consumer at the time of making a request for the relevant payment and before such payment is authorised. It is worth noting that the FX conversion rate should only be disclosed where the Section 1073 Provider has knowledge that such a conversion will take place. In the absence of such knowledge, the Section 1073 Provider may rely on a representation by the US consumer regarding the currency in which the funds will be received in by the beneficiary. In the event that the US consumer does not know if the recipient's account is denominated in a different currency, the Section 1073 Provider may assume that the receipt currency is the same as the funding currency and accordingly no relevant disclosure will be required.
- The receipt disclosure consists of the following information, which must be provided to the consumer when the payment is authorised: the promised delivery date / maximum execution cycle, the phone number or address of the recipient, the available error resolution rights and the contact information of the Section 1073 Provider and its regulator, as well as the Consumer Financial Protection Bureau (CFPB) toll free number for consumer complaints. In addition, the information contained in the prepayment disclosure must be restated.
But why should we care in the European Union?
On first sight, Section 1073 relates to payments where the originator is a US consumer and is aimed at protecting such individuals - therefore, why should we care in the European Union ( )? There are various reasons as to why Section 1073 will affect payments beyond the US.
One of the key issues with the disclosure requirements of Section 1073 becomes accentuated in the (quite common) situation of a long chain of intermediaries between the payer and the payee. Under Section 1073, where a cross-border retail payment occurs, the retail payer has to be informed of all relevant fees and other costs that will be withheld before the payment in question reaches the payee. Obtaining this information however, is rather complicated in practice, especially when many intermediaries and different states are involved.
To start with the simplest case, the various disclosure obligations imposed on Section 1073 Providers will inevitably translate into them making increased requests for information as to fees, taxes and other matters from intermediaries down the payment chain. Inevitably, these requests will be passed on to non-US institutions, which will have to comply in a timely manner. It remains to be seen whether Section 1073 Providers will request for the formalisation of certain information provision arrangements in the interbank space to address their new obligations. Currently, fees applied by the beneficiary bank are not visible to the Section 1073 Provider initiating the cross-border payment in question and there may be issues under privacy laws or other constraints that prevent foreign institutions from providing the requisite information; the industry will need to consider how to best address these. Moreover, US subsidiaries of institutions falling within the definition of a Section 1073 Provider will have to ensure that they comply with all the requirements of this section.
Another important matter that could be significant for payment providers is the fact that Section 1073 seems to contradict certain provisions that have been the 'norm' for cross-border transfers in the since the coming into force of Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market (Payment Services Directive - 'PSD'). One example includes the importance placed on the beneficiary's name, rather than the account number/IBAN (which has been the norm in the ). Under Section 1073, Section 1073 Providers will have to pay the beneficiary on the basis of the name provided to them by the US consumer, who will not be liable for providing incorrect account details. This practice contradicts the internationally accepted emphasis on account numbers and IBANs and may complicate matters between providers when for example a payment involves a chain of Section 1073 Providers and entities.
It should be noted that the coming into force of Section 1073 has been slightly postponed and the CFPB has taken into account some of the comments to its original proposals, stating that:
- in respect of liability for sender error, the proposed rule will acknowledge that a sender is ultimately responsible for providing correct account information, thereby addressing some of the concerns noted above;
- in respect of foreign tax disclosures, the proposed rule will simplify the requirement relating to the collection of foreign tax data, by limiting the disclosure obligation to national level taxes and by providing "latitude" for variances between disclosed amounts and actual amounts;
- in respect of beneficiary account fees, the proposed rule will "relax" the relevant disclosure requirement, providing instead for a safe harbour method for estimating such fees. This illustrates an acknowledgement of the unique characteristics of open networks, as well as of the inherent difficulty for a Section 1073 Provider to know what fees a customer is charged by its bank.
These proposed rule changes constitute a comforting message and are the product of intense industry lobbying. Section 1073 goes far beyond the consumer protection provisions of the PSD and risks hindering competition and reducing consumer choice by forcing traditional banks to exit the market, leaving money remitter type closed-loop payment service providers as the sole service providers. Moreover, Section 1073 should follow the PSD approach, which acknowledges that payment service providers outside of the cannot be made subject to rules and correctly limits liability for European providers to intra- / payment transactions.
Dermot Turing is a Partner and Maria Troullinou is an Associate in the financial regulation group at Clifford Chance in London. Ruth Wandhöfer is the Chair of the Information Security Support Group.
Related links and references:
Dodd Frank Wall Street Reform and Consumer Protection Act http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf
Duygu Tavan (October 2012) 'Correspondent banking under Dodd-Frank, Section 1073: the new normal', article in the Banker, available online at www.thebanker.com.
Ruth Wandhofer Citi Transaction Services 'Dodd Frank Remittance Rules - Regulation E', presentation, available online at www.citibank.com/transactionservices/home/about_us/online_academy/docs/dodd_frank_remittance.pdf.
Payments Market Practice Group and The Clearing House Association LLC (October 2012) 'White Paper on Dodd Frank Section 1073 - Cross-border Remittance Transfers' (version 2.0).
Neil Burton (March 2012) 'Dodd-Frank Section 1073 has potential global impact', available online at www.finextra.com.
Related articles in previous issues:
1 CFPB supplementary final rule of August 2012.
2 In September 2012 a list of 'safe harbour' countries was published: Aruba, Brazil, China, Ethiopia and Libya.
3 A list of services that qualify for this is also expected to be published.
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