With just hours to go in its session, California lawmakers adopted AB 1864 and SB 819, which overhauls California’s Department of Business Oversight (DBO) and revamps it as a “mini-CFPB,” styled after the federal financial watchdog.
This legislation has far-reaching implications for the financial and fintech industries. It renames DBO the Department of Financial Protection and Innovation (DFPI), and gives it awesome new powers, including the authority to regulate almost any “financial product or service.” According to legislative analysis, it is estimated that over three-quarters of the “newly covered persons” subject to this law are debt collectors.
Among the goals and purposes enumerated with the legislation are to “[p]rotect consumers from predatory businesses, without imposing undue burdens on honest and fair operators” and to “[e]xtend state oversight to important financial-services providers not currently subject to state supervision.” With the federal financial watchdog restrained under a conservative presidential administration, the DFPI’s stated purpose is also to “[r]estore financial protections that have been paralyzed at the federal level.”
Whether consumer protection and undue burden are ultimately balanced will be seen in the coming years, and the balance will be an ongoing challenge to maintain. And while the broad grant of authority within the law’s text raises some eyebrows, this was a great move by the legislature and the executive branch for multiple reasons.
Benefits of Executive Branch Policy-Making Power
First, it gives policy-making power to the appropriate branch of government: the executive branch. Armed with a mandate to protect Californians against unfair, deceptive and abusive business practices, and with a bench of financial experts, the DFPI can craft rules and pursue actions against a broader set of actors than it previously could, and keep up with technology in a way the legislature directly never could.
The explosion of financial technology in recent years, called “the rise of fintech,” has created all types of new businesses that touch money in some way. The only uniting thing about all these companies is that almost all of their business models were inconceivable at the time when the old financial laws were written.
This new department can now craft rules that accommodate new technology flexibly, rather than force new tools to fit into rigid boxes under decades old (and sometimes centuries old) law.
Second, it cuts off prior attempts at legislative regulation, which were very detailed and potentially over-engineered. Now, rather than enshrining in law a complex set of rules for ever-evolving companies, rules that could become obsolete by the time they became law, this new department can pursue functional regulation, act with agility, and write rules as the need occurs and for the moment.
While the legislation doesn’t come with the additional funding originally requested by the governor (among other things, you can thank a pandemic-strapped state budget for that), the tools are now in place for a fintech regulatory framework that matches the 21st century.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Matthew Kopko is the vice president of public policy for DailyPay. He previously served in a similar role at Bird, the micromobility company, and prior to that was a senior government official and an attorney in private practice.