BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Noreen Evans, Chair 2013-2014 Regular Session AB 2209 (Dickinson) Hearing Date: June 18, 2014 As Amended: June 9, 2014 Fiscal: Yes Urgency: No SUMMARY Would update the Money Transmission Act (MTA) to ensure that electronic commerce (e-commerce) transactions are not inadvertently regulated as money transmission and make other changes intended to reflect the increasing use of the Internet as a platform for the exchange of goods and services. DESCRIPTION 1. Would amend the MTA to add a definition of "e-commerce," which would be defined as the transaction of goods or services initiated via the Internet or mobile application. 2. Would provide that the MTA does not apply to a transaction in which the recipient of the money or other monetary value is an agent of a payee, and delivery of the money or other monetary value to the agent satisfies the payor's obligation to the payee. Would define agent by reference to Section 2295 of the Civil Code, and would define payor and payee by reference to one another (e.g., payee would mean the provider of goods or services, who is owed payment from the payor, and payor would mean the recipient of goods or services, who owes payment to the payee). 3. Would amend the provision of the MTA giving the Commissioner of Business Oversight (commissioner) authority to impose any conditions on any authorization, approval, license, or order issued pursuant to the MTA as follows: The commissioner may impose on any authorization, approval, license, or order issued pursuant to this division any conditions thathe or she deemsare necessary for the safety and soundness of the licensee, or reasonable or necessary tothe public interestmaintain or enhance consumer protection . AB 2209 (Dickinson), Page 2 4. Would require MTA licensees to include in their quarterly reports to the commissioner the extent to which the money transmission volume included in those reports reflects transactions conducted via mobile application or Internet website, if such reporting is feasible. 5. Would amend the provision of the MTA that exempts certain licensees from the requirement to provide their agents with training materials on how to recognize and appropriately respond to elder or dependent adult financial abuse, by adding two additional exempt groups: licensees who exclusively offer their services via a mobile application, and licensees who exclusively offer their services via both the Internet and a mobile application. 6. Would add to the definition of an eligible security any receivable owed by a bank and resulting from a debit-funded transmission. 7. Would authorize the commissioner to declare a credit rating agency to be an eligible securities rating service, as specified. 8. Would provide that if a customer's instructions to forward or transmit money are not complied with by a licensee, and the money has not yet been forwarded or transmitted by the licensee, a customer has a right to a refund of his or her money. 9. Would specify the information that MTA licensees must include on the receipts they are required to provide to customers. Would clarify that receipts may be provided electronically for transactions that are initiated electronically, or when a customer agrees to receive an electronic receipt. 10. Would exempt MTA licensees from providing receipts informing customers of their right to a refund when the sender is a commercial entity or the transaction involves any of the following: the United States or a department, agency, or instrumentality thereof, including any Federal Reserve Bank or any Federal Home Loan Bank, or the United States Postal Service; or a state, county, city, or any other governmental agency or governmental subdivision of a state. AB 2209 (Dickinson), Page 3 11. Would authorize the commissioner to approve disclosures tailored to licensees or agents that conduct money transmission via an Internet web site or a mobile application. 12. Would require any Internet web site through which a licensee conducts money transmission to clearly identify the name of the licensee and any trade names used by the licensee. 13. Would add a requirement that licensees maintain any records required by the commissioner. 14. Would amend the provision of the MTA authorizing the commissioner to offer guidance to prospective applicants, as follows: The commissioner may offer informal guidance to any prospective applicant for a license under this division, regarding the conditions of licensure that may be applied to that person. The commissioner shall inform any applicant that requests that guidance of the minimum net worth, and other licensing requirements , that may be required of that applicant, based on the information provided by the applicant concerning its plan to conduct business under this division , and the factors used to make that determination as described in Section 2040. 15. Would add a provision to the MTA providing that if, at any time, the commissioner deems it necessary for the general welfare of the public, he or she may exercise any power set forth in the MTA with respect to a money transmission business, regardless of whether an application for a license has been filed with the commissioner, a license has been issued, or, if issued, a license has been surrendered, suspended, or revoked. EXISTING LAW 16. Pursuant to AB 2789 (Committee on Banking & Finance), Chapter 612, Statutes of 2010; effective July 1, 2011), provides for the MTA (Financial Code Section 2000 et seq.). That measure consolidated 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 Business Oversight (DBO). 17. Pursuant to the MTA, money transmission includes selling or AB 2209 (Dickinson), Page 4 issuing payment instruments, selling or issuing stored value, and receiving money for transmission (Section 2003). COMMENTS 1. Purpose: This bill is intended to update the MTA to ensure that e-commerce transactions are not inadvertently regulated as money transmission and make other changes intended to reflect the increasing use of the Internet as a platform for the exchange of goods and services. 2. Background: The MTA that is the subject of this bill has been operative in California since July, 2011, pursuant to AB 2789 (Committee on Banking & Finance), Chapter 612, Statutes of 2010. AB 2789 combined three separate, related laws into a single MTA, which preserved all of the substantive provisions of each of the three, previously separate laws, and added a handful of new, substantive provisions. The most important of those new, substantive provisions: a. Regulated the issuance of open loop, stored value cards by nondepository institutions: 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 gift card). b. Regulated domestic (intra-U.S.) money transmission: Prior to enactment of AB 2789, international money transmission by nondepository institutions was regulated under California's Transmission of Money Abroad Law, but domestic money transmission by nondepository institutions was not. AB 2789 required nondepository institutions that transmit money domestically, or abroad, or both, to obtain an MTA license. c. Brought some previously unlicensed money transmitters into California's regulatory scheme: Prior to enactment of AB 2789, California's Transmission of Money Abroad Law did not have a physical presence requirement (thus, certain Internet-based money transmitters could legally operate in California without a license). Under AB 2789, any AB 2209 (Dickinson), Page 5 money transmitter that does business with a person located in California requires a license. Last year, Assemblyman Dickinson carried AB 786 (Chapter 533, Statutes of 2013) to ameliorate some unintended consequences resulting from inclusion of the three provisions listed immediately above into AB 2789, and to begin updating California's MTA to reflect electronic commerce transactions. AB 2209 is a follow-up to AB 786; it continues the process of updating and clarifying the MTA, particularly as the law applies to transactions initiated over the Internet and via mobile applications. 3. Discussion: Each of the substantive provisions of AB 2209 is summarized below. Changes made by the bill, which are not discussed below, are self-explanatory. a. Excluding third party agents from the MTA: Many goods and services are exchanged with the assistance of third parties, particularly over the Internet. For example, if a consumer visits an online marketplace such as Amazon.com, iTunes, or eBay to purchase an item, he or she is often purchasing from the merchant or artist listing their good or service on the marketplace, not from the operator of the marketplace. In this scenario, the consumer's payment obligation is to the ultimate recipient of the payment, and not to the third party intermediary. AB 2209 would amend the MTA to provide that the third party in these examples is not required to be licensed as a money transmitter, as long as the third party has an agency relationship with the seller, and as long as the money sent to the third party by the buyer satisfies the buyer's obligation to the seller. According to the author's office, four other states, including New York, Nevada, Ohio, and Texas, have added a similar "third party agent" exemption to their money transmission laws. b. Elder or dependent adult financial abuse: Under the existing MTA, licensees that exclusively offer their services over the Internet are exempt from the requirement to provide their agents with training materials on how to recognize and appropriately respond to elder or dependent adult financial abuse. This bill AB 2209 (Dickinson), Page 6 adds two groups to this exemption: licensees who exclusively offer their services via a mobile application, and licensees who exclusively offer their services via both the Internet and a mobile application. c. Declaring a credit rating agency an eligible securities rating service: According to the author's office, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) uses the term credit rating agency to describe what existing California law describes as a securities rating service. This bill updates the MTA to reflect the term used in Dodd-Frank. d. Clarification of right to refund when sender's instructions are not followed and money is not sent: This right to a refund is required to be listed on the receipt that licensees must provide to customers, but is not expressly authorized elsewhere in existing California statute. AB 2209 would expressly authorize this right in statute. e. Changes to receipt requirements: Existing law requires MTA licensees to provide consumers with a receipt. This bill changes the wording of the receipt to reflect recent changes made to the federal Electronic Funds Transfer Act and its implementing regulation. Pursuant to these federal rules, money transmission receipts must include several disclosures relating to fees and the exchange rate. AB 2209 requires this information to be included on MTA receipts. AB 2209 also eliminates the requirement for MTA licensees to include right to refund language on receipts involving transactions in which the sender is a commercial entity, and transactions that involve any of the following: the United States or a department, agency, or instrumentality thereof, including any Federal Reserve Bank or any Federal Home Loan Bank, or the United States Postal Service; or a state, county, city, or any other governmental agency or governmental subdivision of a state. DBO staff requested these exemptions on grounds that the senders in these transactions are sophisticated entities, and therefore do not require right to refund disclosures on their receipts. These entities would still be entitled to refunds, but their receipts would not advise these entities of that right. AB 2209 (Dickinson), Page 7 Finally, AB 2209 updates MTA receipt requirements to provide that a receipt may be provided electronically, if a consumer opts for this method of delivery. f. Records retention requirement: Under the existing MTA, licensees are required to maintain several types of records for determining their compliance with the MTA, and to retain these records for at least three years. The list of records that must be retained includes a catch-all requirement that reads "any other records the commissioner reasonably requires by order or regulation." AB 2209 would add an additional recordkeeping requirement to the MTA stating that "each licensee shall maintain any other records required by the commissioner." According to DBO, the language being added by AB 2209 is not duplicative of the language in existing law. Existing law describes records to be used by a licensee for determining compliance with the MTA, and requires licensees to maintain those records for three years. The new language that AB 2209 would add authorizes the commissioner to require licensees to retain any records for any reason and for any length of time. g. Informal guidance to prospective applicants: AB 786 authorized the commissioner to offer guidance to prospective applicants regarding licensing requirements, including the potential net worth that may be required of an applicant. AB 2209 would clarify that this guidance is informal and is based only upon information provided by the applicant regarding its plan to conduct business. h. Authority to enforce the MTA against licensees and unlicensed money transmitters: AB 2209 adds a provision to the MTA clarifying the commissioner's authority to take action(s) with respect to a money transmission business that he or she deems necessary for public protection, whether or not that business holds an MTA license. According to the author's office, this provision restates existing law, to clarify that the commissioner may take action against unlicensed money transmitters. Some entities engaging in the business of money transmission have claimed that they do not have to respond to orders issued by DBO, because they are not AB 2209 (Dickinson), Page 8 licensed by the Department. 4. Summary of Arguments in Support: The California Retailers Association, California Chamber of Commerce, Tech America, The Internet Association, and TechNet support the bill, based on its provision ensuring that the MTA does not apply to entities which act as merchants' agents in a payor/payee context. "This change is critical to companies that operate online marketplaces...Requiring the operators of every marketplace to obtain a MTA license is inconsistent with the overall intent of the MTA and would be very costly to the operators of those companies, the small businesses that use those marketplaces, and, ultimately, consumers. The small businesses that utilize marketplaces to sell their goods would, at a minimum, be forced to pay more to bring their products and services to market, thus harming themselves and consumers. At worst, the cost of complying with the MTA would cause marketplace operators to shut down, depriving small businesses of the opportunity to use those platforms to reach consumers." 5. Summary of Arguments in Opposition: ITC Financial Licenses, a licensed money transmitter in 46 states, including California, opposes AB 2209 unless it is amended to delete the provision that provides the MTA does not apply to entities which act as merchants' agents in a payor/payee context. "We believe that codifying the 'agent of the payee' exemption poses significant risks to consumers, because it would permit the transmission of consumer funds to and from third party intermediaries without the need for such third parties to obtain a money transmitter license or be authorized as an 'agent' of a licensed money transmitter under California law. As a result, none of the consumer protections established under California's MTA - for example, consumer disclosure, receipt, permissible investment, and recordkeeping and reporting obligations - would apply to the benefit of consumers." ITC is concerned that the exemption contained in the bill would allow entities to engage in all of the following types of money transmission without any regulatory oversight: bill payments, payments to merchants for goods and services, online accounts (e.g., PayPal accounts), and payments to virtual currency exchanges or payments made using virtual currency. According to ITC Financial Licenses, "Seventeen states have expressly confirmed and about twenty states have AB 2209 (Dickinson), Page 9 informally confirmed that they do not recognize the 'agent of the payee' exemption and, instead, require bill payment companies to be licensed money transmitters. Only five states accept the 'agent of the payee' exemption. Of those five, three require specific conditions that must be met before exempting third parties from licensure requirements." AB 2209 (Dickinson), Page 10 6. Amendments: a. The following three clarifying amendments will be offered by the author in Committee: i. Page 4, lines 24 and 25, revise as follows: "E-commerce means anythetransaction where the payment forofgoods or services is initiated via the Internet or a mobile application." According to persons representing the technology industry, the revised definition more accurately describes e-commerce. ii. Page 17, lines 32 and 33, strike "If a customer does not receive his or her refund," This amendment makes it clear that customers have a cause of action for any violation of Section 2102, not just for violations involving failure of a licensee to provide a refund. iii. Page 18, line 8, strike "sender or". This amendment reflects the manner in which customers are identified elsewhere in the MTA. b. If this Committee wishes to ensure that all customers entitled to a refund receive receipts informing them of that right, it would ask the author to delete the exemptions for transactions involving specified federal, state, or local government entities and transactions in which the sender is a commercial entity (Page 19, lines 34 through 38). 7. Prior and Related Legislation: a. AB 786 (Dickinson), Chapter 533, Statutes of 2013: Made numerous changes to the MTA, including, among others, granting a limited exemption for payroll processing firms, reducing minimum net worth requirements, authorizing the commissioner to grant partial exemptions from the MTA, revising what constitutes an eligible security for purposes of the MTA, and requiring the issuance of specified regulations by the commissioner. b. AB 2789 (Committee on Banking & Finance), Chapter 612, Statutes of 2010. Consolidated the Transmission of AB 2209 (Dickinson), Page 11 Money Abroad Law, Travelers Checks Act, and the Payment Instruments Law into a single Money Transmission Act, administered by DFI; effective July 1, 2011. LIST OF REGISTERED SUPPORT/OPPOSITION Support California Retailers Association California Chamber of Commerce TechAmerica TechNet The Internet Association AB 2209 (Dickinson), Page 12 Opposition ITC Financial Licenses Consultant: Eileen Newhall (916) 651-4102