A Change in State Oversight Prompts California’s Investment Advisors to Review Their Policies and Procedures

To help strengthen the state’s consumer protection laws and oversight of the financial industry, California has passed legislation that has changed the name of the Department of Business Oversight (DBO) to the Department of Financial Protection and Innovation (DFPI) and expanded its oversight role and enforcement powers. 

10.13.2020

The decision to revamp the DBO is part of a larger effort championed by California Governor Gavin Newsom that will take effect on Jan. 1, 2021. That is when the new California Consumer Financial Protection Law (CCFPL) will expand the state’s enforcement powers to protect California consumers from pandemic-inspired scams and increase education and outreach for vulnerable groups.

The CCFPL gives the DFPI increased supervision over financial services not previously subject to the department’s regulatory oversight. The DFPI now has the authority to oversee previously unregulated industries, including debt collectors, rent-to-own contracts, consumer credit reporting agencies, credit repair agencies, and other entities.

As Californians face predatory and abusive financial practices because of the severe economic crisis created by the COVID-19 pandemic and wildfires, including scams involving high-priced loans and other risky financial products, the DFPI will have additional authority and resources to monitor a larger number of companies that have thus far avoided state oversight.

California is strengthening state oversight at a time the federal Consumer Financial Protection Bureau has decreased the level of enforcement of consumer financial protection laws and reduced penalties on firms proven to have harmed consumers. The DFPI is being funded using the DBO’s existing reserve fund from past enforcement actions.

 

The DFPI’s Three-Year Plan

Over the next three years, the DFPI is scheduled to add 90 positions as part of California’s overall effort to help protect consumers in a state that would rank as the world’s fifth-largest economy.

Specifically, the DFPI will:

  • Add dozens of investigators and attorneys to supervise financial institutions;
  • Create a team that will monitor markets to proactively identify potential emerging risks to consumers;
  • Create a team dedicated to consumer education and outreach with an emphasis on listening and responding to consumers in specific communities, including veterans, immigrants, and older Californians;
  • Create a new Office of Financial Technology and Innovation, which will cultivate financial technology to serve – and not to exploit – consumers; and
  • Create an Office of the Ombudsman to make certain complaints about the DFPI receive a confidential, full, and impartial review and resolution.

Current DBO licensees and previously unlicensed entities covered by the CCFPL should prepare for increased oversight by a significantly expanded California state financial regulator.

State officials have been working to update all the templates, forms, and logos related to the change from the DBO to the DFPI. Although some documents may continue to reflect the DBO name during this transition period, it is important to note that all letters and documents with either the DBO or DFPI name carry the full force of the law. Emails and phone calls to the DBO are being referred automatically to the DFPI.

 

Review Your Firm’s Policies and Procedures

Since the name change from the DBO to the DFPI already has taken effect, compliance consultant Adam Stutz says there are tasks state registered investment advisers should complete to make certain their materials remain accurate.

“Advisers would be well-served to review all of their policy and procedure manuals, any disclosures on their website, marketing collateral, advisory agreements, and any other documents that reference the DBO by name,” Stutz said. “Additionally, Form ADV updates should be made and filed promptly if the Form ADV mentions the DBO by name.”

Making the necessary updates to materials prompted by the name change from the DBO to the DFPI could be part of a larger effort by your firm to review all marketing materials, policy and procedure manuals, and Form ADV to make certain all information in these essential documents remains up-to-date. Core Compliance has experienced professionals who can help. Contact us at 619.278.0020 or info@corecls.com.