BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair AB 2789 (Committee on Banking & Finance) Hearing Date: June 30, 2010 As Amended: June 10, 2010 Fiscal: Yes Urgency: No VOTES: Asm. Floor.(05/06/10)68-05/Pass Asm. Appr. (04/28/10)14-01/Pass Asm. B. & F. (04/19/10)11-01/Pass SUMMARY Would consolidate the Transmission of Money Abroad Law, Travelers Checks Act, and the Payment Instruments Law into a single Money Transmission Act, administered by the Department of Financial Institutions. DIGEST Existing law 1. Gives the Department of Financial Institutions (DFI) authority to regulate the transmission of money abroad (pursuant to the Transmission of Money Abroad Law, Financial Section 1800 et seq.), the issuance of travelers checks (pursuant to the Travelers Checks Act, Financial Section 1851 et seq.), and the issuance of payment instruments, such as money orders (pursuant to the Payment Instruments Law, Financial Code Section 33000 et seq.). This bill 1. Would consolidate the three laws referenced above into a single, uniform Money Transmission Act, which would be administered by DFI, as specified, and as described in more detail below. COMMENTS 1. Purpose of the bill To consolidate three licensing laws AB 2789 (Committee on B. & F.), Page 2 into a single, unified law, close loopholes in existing law, and improve consumer protections. 2. Background California is unique among states in our regulation of money transmission, the issuance and sale of travelers checks, and the issuance and sale of money orders and other payment instruments. Forty-seven other states and the District of Columbia regulate these activities under a single law, while California requires three separate laws, all administered by DFI, for this purpose. AB 2789 would combine these three laws into a single Money Transmission Act, administered by DFI. This new law would preserve all of the substantive provisions in each of the three existing laws, and additionally add the following substantive new provisions, which would do the following: a. Regulate the issuance of open loop, stored value cards by non-bank entities: Stored value cards may be either closed loop (redeemable by the issuer for goods or services provided by the issuer or its affiliate; e.g., a Starbucks card) or open loop (redeemable for goods or services at multiple vendors; e.g., a Visa check card). Although the sponsor and DFI are currently unaware of many non-bank issuers of open loop stored value cards, both believe that more firms will enter this marketplace in the near-term future. AB 2789 is intended to ensure that the issuers of these cards are regulated. b. Consolidate and modernize the money transmission, payment instruments, and travelers check issuance laws. c. Regulate domestic (intra-U.S.) money transmission: At present, international money transmission is regulated in California, but domestic money transmission, when made by an entity that is not a depository institution, is not. AB 2789 would close that loophole, and, in doing so, help protect certain unbanked and underbanked individuals who use money transmitters to send money domestically. d. Bring some previously unlicensed money transmitters into our regulatory scheme: California's money transmission law currently requires those who accept money in California for transmission abroad to AB 2789 (Committee on B. & F.), Page 3 be licensed, but does not have a physical presence requirement (thus, certain Internet-based money transmitters may legally operate in California without a license). Under AB 2789, any money transmitter that does business with a person located in California requires a license. e. Require those who wish to acquire control of an issuer of travelers checks or payment instruments to receive prior permission from DFI for the acquisition: An application for acquisition of control is currently required under the money transmitters law, but not under the travelers checks or payment instruments laws. AB 2789 would require any entity that wishes to acquire control of a Money Transmission Act licensee to apply to, and receive permission from DFI for that acquisition. f. Give DFI more authority over the composition and valuation of so-called "eligible securities," which are used to satisfy existing law liquidity requirements: Existing law requires money transmission and payment instruments licensees to own eligible securities having an aggregate market value that is equal to or greater than the aggregate amount of all of their outstanding payment instruments and outstanding money received for transmission (essentially, a 1:1 liquidity ratio). AB 2789 will extend these liquidity requirements to companies that issue open loop, stored value cards. The bill will also give DFI greater authority to specify the types of investments and the concentration per type of investment that are allowable for eligible securities, and will give DFI the ability to order changes in a licensee's eligible securities, as DFI deems necessary to ensure the safety and soundness of the licensee. g. Create a new requirement that issuers of payment instruments and stored value cards maintain securities on deposit or a surety bond of at least $500,000 or 50% of the average daily outstanding payment instrument and stored value obligations in California, whichever is greater. h. Require licensees and agents of licensees to prominently post a notice at each branch office, AB 2789 (Committee on B. & F.), Page 4 informing customers that they may direct complaints about any aspect of the money transmission activities conducted at that location to DFI via a specific toll-free phone number, e-mail address, or via regular mail to a specific mailing address. The provisions of this bill have been negotiated by affected industry groups, DFI, and consumer groups, and are believed to reflect a consensus. 3. Support The Money Services Round Table (MSRT), a trade association of money transmitters and stored value card issuers, is sponsoring AB 2789, to bring California into line with the vast majority of states, with respect to our regulation of money transmission, issuance of travelers checks, and issuance of payment instruments. As noted above, California is the only state with three licensing laws governing these activities. All other states have moved to a unitary licensing regime, which MSRT asserts is efficient for both the regulated industry and the regulator. According to MSRT, AB 2789 preserves all of the existing safety and soundness and consumer protection provisions of existing law, as well as existing licensing exemptions for entities such as depository institutions. Licensing fees would remain at current levels. However, the bill would increase consumer protection by requiring licensees and their sales outlets to post information informing customers that complaints may be filed with DFI, and by requiring all entities that wish to acquire control of a licensee to receive prior approval for that acquisition from DFI. The bill would also close two existing California loopholes, by licensing domestic money transfers and the issuance of open loop stored value cards by non-bank institutions. MSRT believes that the bill will provide DFI with needed flexibility to respond to the regulatory challenges posed by fast-emerging funds transmission technologies. 4. Opposition None received. 5. Suggested Amendments a. DFI and the sponsor have identified a handful of technical amendments, which they recommend to correct minor drafting errors in the June 10th, 2010 AB 2789 (Committee on B. & F.), Page 5 version of the bill. These amendments have been reviewed by, and are acceptable to the author, sponsor, DFI, and key interested parties: Page 10, line 6, after "for" insert: transactions that involve Page 10, line 7, strike "transactions" Page 11, line 13, after "engaging" insert: in Page 18, lines 26 and 30: after "shareholders'" insert: or members' Page 25, lines 14, 24, and 28, strike "12 U.S.C." and insert: 15 U.S.C. Page 26, line 26, strike "1830" and insert: 1832 Page 27, line 33, after "insured" insert: credit union. b. The California Retailers Association requests an amendment, to more closely conform the definition of stored value in the bill with the rules for gift certificates in Civil Code Section 1749.5. That amendment, which is also acceptable to the author, sponsor, DFI, and key interested parties, would add the following clause to the stored value definition: Page 6, line 30, after "affiliate" insert: , except to the extent required by applicable law to be redeemable in cash for its cash value. 6. Prior Legislation a. AB 1508 (Lieu), Chapter 242, Statutes of 2007: Streamlined certain procedural requirements under the Money Transmitters Law, more closely aligned that law with laws governing the issuance of travelers checks and money orders, and gave DFI greater ability to take prompt corrective action against licensed money transmitters found to be operating improperly. POSITIONS Support AB 2789 (Committee on B. & F.), Page 6 The Money Services Round Table (sponsor) Consumers Union Oppose None received Consultant: Eileen Newhall (916) 651-4102