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June 25, 2012
An interview with a risk expert: The costs of complying with Dodd-Frank 1073
This week's post features an interview with Devon Marsh, senior vice president and treasury management risk manager at Wells Fargo Bank, N.A. We asked Devon for his thoughts on recent amendments to Regulation E as a result of Section 1073 of the Dodd-Frank Act.
P&R: Devon, what is the interest of Dodd-Frank 1073 to a risk manager?
Devon Marsh: I'm interested for a couple of reasons. First, it imposes a compliance obligation—and a steep one. The second reason I'm interested, and the reason that concerns me more than our ability to comply, is that this rule poses risk to consumers and financial institutions.
P&R: How can a rule aimed at consumer protection pose a risk to consumers?
Marsh: There is a risk that familiar services may become harder to find if some remittance providers such as banks can no longer afford the new compliance costs imposed by 1073. Remittance services are vital to some consumers, and they are at risk of having fewer providers from which to choose.
P&R: The new rule is designed to improve consumer protections in remittance transfers. What are some of the specific challenges that remittance providers will face?
Marsh: The new rule requires very detailed disclosures with a lot more information, so that consumers on both sides of the remittance transaction can better understand how fees reduce the payment transfer. The problem that arises is that remittance providers may not know the exact amount of all the fees. For example, they may not know the tax rates on a given day in a small municipality in another country. In certain countries, tax rates change depending on the day or the total volume of remittances over a period of time. You can't disclose what you can't possibly know.
The new error resolution process defined by the rule is another example where providers will be challenged to comply. In the new rule, remittance providers are responsible not only for their own mistakes, but for errors committed by consumers. If a consumer happens to enter the wrong beneficiary account number, for example, the remittance provider must cover any loss associated with the transaction, even though the consumer error was out of its control.
Because remittance providers are now responsible for consumer error, the rule may create the risk of intentional fraud, whereby a criminal could send a remittance to an accomplice who collects the money. Then the person sending the funds could claim that the funds never reached the intended beneficiary, saying they provided the wrong account number. In such a situation, it would be exceedingly difficult for a remittance provider to prove that an error did not take place, and even more difficult to recover funds.
If fraud losses increase for remittances, the price of remittances will increase. The risk of fraud loss, added to the cost of compliance on the front end, may prove too great for some providers to bear, so they may exit the business. Consequently, consumers could have fewer options for sending remittances, and higher costs for the service due to fraud losses.
P&R: What can remittance providers do to address the challenges in this rule?
Marsh: Given the tight time frame, it looks like remittance providers can't do much to change the rule. Hopefully, more dialogue with regulators and policymakers can influence understanding and lead to new industry perspectives on how remittance providers will deal with compliance challenges imposed by 1073. If not, the consumer may have fewer choices and higher prices than they have today.
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