The Consumer Financial Protection Bureau (CFPB) recently brought its first data security enforcement action, adding itself to the growing list of federal regulators tackling data security issues. The CFPB’s enforcement action was against Dwolla Inc., a Des Moines, Iowa-based online payment platform. The CFPB alleged that Dwolla misrepresented its data security practices, and as a result, Dwolla agreed to pay a $100,000 penalty and to implement significant data security measures.1 While this is only its first data security-related action, the CFPB appears to be taking very seriously its role in securing consumers’ financial information. The requirements the agency placed on Dwolla’s board of directors make this clear, as the board will be held accountable for any security shortcoming by the company. This goes beyond the typical requirements imposed by the Federal Trade Commission (FTC), the regulator with the most extensive data security experience, in its data security enforcement actions. As such, companies, especially financial technology start-ups, should take note of the data security requirements placed on Dwolla by the CFPB, and ensure that any statements made regarding the security of consumers’ information are accurate.
The CFPB regulates entities that provide consumer financial products or services (covered entities).2 These entities include certain depository institutions, such as commercial and savings banks, as well as non-depository entities, such as mortgage bankers, loan servicers, payday lenders, debt collectors, and other financial service providers. Under the Consumer Financial Protection Act (CFPA), the CFPB has the authority to take actions to prevent such covered entities from committing or engaging in unfair, deceptive, or abusive acts or practices.3 The CFPB construes its jurisdiction broadly and has taken action against companies not traditionally associated with providing financial products or services. For example, the CFPB pursued mobile service providers for conduct related to the billing of third-party services through the mobile providers’ platforms.4 Dwolla is a start-up in the online payment processing industry that, as of May 2015, had more than 650,000 customer accounts and transferred as much as $5 million a day. In order to process these payments, Dwolla collected personal and sensitive information from users, including Social Security numbers, bank account and routing numbers, passwords, and PINs. In the consent order between the CFPB and Dwolla, the CFPB alleged that Dwolla made numerous representations on its website and in communications with consumers about the security measures it employed to protect this sensitive information. For example, Dwolla allegedly stated that its data security practices “exceed[ed] industry standards,” that it was compliant with the Payment Card Industry’s Data Security Standards (PCI-DSS), that all sensitive information on its servers was encrypted, and that its website, mobile apps, and connections with third parties used “the latest encryption and secure connections.” The agency, however, alleged that Dwolla was not compliant with PCI-DSS and failed to:
- adopt and implement data-security policies and procedures reasonable and appropriate for the organization;
- use appropriate measures to identify reasonably foreseeable security risks;
- ensure that employees who have access to or handle consumer information received adequate training and guidance about security risks;
- use encryption technologies to properly safeguard sensitive consumer information; and
- practice secure software development, particularly with regard to consumer-facing applications developed at an affiliated website, Dwollalabs.
As a result, the CFPB alleged that Dwolla’s statements were likely to mislead consumers into believing that Dwolla had reasonable and appropriate security practices in place. The agency also alleged that these were material misrepresentations because they were likely to affect a consumer’s choice regarding whether to join Dwolla’s payment processing network. The CFPB claimed that these material misrepresentations constituted deceptive acts or practices in violations of the CFPA. The CFPB’s order did not include any allegations of a data breach, security incident, or consumer complaint resulting from the inadequate security practices, and Dwolla confirmed that there had been no such incident or complaint in a statement following the announcement of the order.5
Under the terms of the five-year order, Dwolla must pay a $100,000 penalty and is prohibited from making misrepresentations about its data security practices, its compliance with PCI-DSS, or its adherence to any relevant data security standards or best practices. In addition, Dwolla must implement reasonable and appropriate data security measures to protect consumers’ personal information stored on or transmitted through its network and applications, including to:
- establish, implement, and maintain a written, comprehensive data security plan that is reasonably designed to protect the confidentiality, integrity, and availability of sensitive consumer information, which contains administrative, technical, and physical safeguards appropriate to Dwolla’s size and complexity, the nature and scope of Dwolla’s activities, and the sensitivity of the personal information collected about consumers;
- adopt and implement reasonable and appropriate data security policies and procedures;
- designate a qualified person to coordinate and be accountable for the data-security program;
- conduct data-security risk assessments twice annually of each area of relevant operation to identify internal and external risks to the security, confidentiality, and integrity of Dwolla’s network, systems, or applications, and to consumers’ sensitive information stored by Dwolla, and to assess the sufficiency of any safeguards in place to control these risks;
- evaluate and adjust the data security program in light of the results of the risk assessments and monitoring required by the order;
- conduct regular, mandatory employee training on Dwolla’s data-security policies and procedures, the safe handling of consumers’ sensitive personal information, and secure software design, development and testing;
- develop, implement, and update, as required, security patches to fix any security vulnerabilities identified in any web or mobile applications;
- develop, implement, and maintain an appropriate method of customer identity authentication at the registration phase and before effecting a funds transfer;
- develop, implement, and maintain reasonable procedures for the selection and retention of service providers capable of maintaining security practices consistent with the order and require service providers by contract to implement and maintain appropriate safeguards; and
- obtain an annual data-security audit from an independent, qualified third party to validate the effectiveness of its periodic risk assessments and its compliance with the order.
Interestingly, the CPFB order also places specific responsibilities on Dwolla’s board of directors. For example, Dwolla’s board must be presented a copy of the independent auditor’s findings, and, within 30 days of receiving the findings, develop a plan to correct any identified deficiencies and implement any recommendations or explain why a recommendation is not being implemented. Importantly, the order specifically states that the board has the ultimate responsibly for proper and sound management of Dwolla and ensuring that the Dwolla complies with federal consumer financial laws and the order. In addition, the order requires the board to:
- review any submissions to the CFPB required by the order prior to their submission;
- authorize any actions necessary to comply with the order;
- require timely reporting by management to the board on the status of compliance obligations; and
- require timely and appropriate corrective action to remedy any material non-compliance with any failures to comply with board directives related to the order.
Comparison to Typical FTC Data Security Actions
While the CFPB is just entering the data security space, several other federal agencies have already established themselves as regulators in the area. The FTC is the primary federal agency regulating data security and organizations familiar with the FTC’s data security enforcement actions will see many similarities in the CFPB requirements discussed above. FTC orders typically require many of the bulleted items listed above, including, for example, the creation and maintenance of a comprehensive data security program, designation of an individual responsible for the program, and evaluation of the program to address new risks as they are identified. There are, however, some important requirements in the CFPB’s order that go beyond typical FTC requirements that companies, especially financial technology start-ups, should understand.
First, there are injunctive provisions that differ from a typical FTC order. The CFPB places significant responsibility for Dwolla’s data security practices and compliance with the order directly on Dwolla’s board of directors. The FTC has not included such requirements in its consent orders. The order also requires Dwolla to undergo annual independent assessments of its security program, as opposed to the FTC’s typical biennial requirement. On the plus side, however, the order’s five-year duration is significantly shorter than that FTC’s typical 20-year consent orders.
Second, the CFPB has the authority to impose civil penalties, among other monetary relief, for unfair, deceptive, or abusive practices. The penalties available start at not more than $5,000 per day for violations, and rise to not more than $25,000 per day for recklessly engaging in violations and not more than $1 million per day for knowing violations.6 The FTC, on the other hand, only has the ability to impose civil penalties in specific types of data security cases, such as cases involving violations of the Children’s Online Privacy Protection Act.
While this order is only the CFPB’s first foray into data security enforcement, it provides insight into what companies subject to its jurisdiction can expect if they fail to implement appropriate security controls or make misrepresentations about the security of information in their control. CFPB Director Richard Cordray provided additional insight into the CFPB’s position on data security in a statement at the release of the order that said, “Consumers entrust digital payment companies with significant amounts of sensitive personal information. With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.” This statement and the order display a clear desire by the CFPB to ensure that financial companies and service providers adequately secure consumers’ information. Directors, in particular, should be aware of the role that the CFPB appears to expect them to play in ensuring that their companies have reasonable and appropriate data security practices in place and would be wise to review how their boards provide oversight and management of data security at their companies.
1 In the Matter of Dwolla, File No. 2016-CFPB-0007 (March 2, 2016), http://files.consumerfinance.gov/f/201603_cfpb_consent-order-dwolla-inc.pdf.
2 12 U.S.C. § 5481(6).
3 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).
4 See e.g., CFPB Press Release, “CFPB Takes Action to Obtain $120 Million in Redress from Sprint and Verizon for Illegal Mobile Cramming,” May 12, 2015, http://www.consumerfinance.gov/newsroom/cfpb-takes-action-to-obtain-120-million-in-redress-from-sprint-and-verizon-for-illegal-mobile-cramming/ (The CFPB claimed it had jurisdiction over the mobile service providers because they extended credit to and processed payments for consumers in connection with third-party goods.).
6 12 U.S.C. § 5565(c).