Editor: David Reiss
Brooklyn Law School

July 30, 2013

Cuomo and Lawsky: Mind The Gap Authority

By David Reiss

Law360 quoted me in a story, NY’s Powerful Financial Regulators Poised To Extend Reach (full story behind a paywall). The story reads in part,

New York’s proposed tougher standards for debt collectors marked state regulators’ first use of their unusual authority to fill gaps in financial regulation, proving state officials will use that power to take charge of the few areas of consumer finance they do not already oversee, attorneys say.
The New York Department of Financial Services has already proved to be an aggressive and creative regulator in its nearly two years of operation, taking on alleged money laundering at Standard Chartered PLC and force-placed insurance, among other moves. Until now, though, Gov. Andrew Cuomo and Financial Services Superintendent Benjamin Lawsky had not fully exploited the state’s “gap authority,” which allows them to regulate areas they feel aren’t sufficiently policed by existing state or federal laws.

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That power makes New York state unique. In most other jurisdictions, state regulators can only regulate financial products and institutions based directly on statute. New York’s regulators can simply decide to enact rules where none exist, and do it quickly, said Brooklyn Law School professor David Reiss.
“You now have an activist government in New York saying, ‘We’re going to look broadly at using this authority we have. So if we hear about problems we can respond to them in six months, not three years,'” Reiss said.

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In addition, there may be some confusion about where the lines between regulations set by the Consumer Financial Protection Bureau — which is considering its own rules for debt collectors — and the DFS may overlap. Technically, the DFS can only extend its gap authority into areas where it feels appropriate rules do not exist, either from state or federal regulators.
The CFPB has consistently asserted that it does not intend to preempt state regulations, and that its rules are merely a floor, Reiss said.

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“We have a governor who has a strong view of gubernatorial authority. He’s appointed an active former prosecutor to a sleepy office and given him a lot of authority, and Lawsky has run with it,” Reiss said.

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