Global App Enforcement Sweep - Lessons For Developers

By Steven P. Farmer

A recent survey of over 1,200 of the top mobile apps in 19 countries by the Global Privacy Enforcement Network ("GPEN") has found that 85% of the apps reviewed were non-compliant, failing to provide even the most basic privacy information to users. 

In addition, 43% failed in their obligation to tailor privacy notices to smaller screens and almost 30% unlawfully requested excessive personal data from users.

Concerns for users are compounded given the lightning speed at which new apps are hitting the market.  Last year, for example, in excess of 1 million apps were reported to be available via Apple's iOS App Store.

Should developers care about these findings?

In short, yes, especially given that the UK privacy regulator, the Information Commissioner's Office ("ICO"), has recently conducted research that demonstrates that around half of app users have decided against downloading an app due to privacy concerns at some point in time. 

Risk for developers does not stop there either. 

As has been well reported elsewhere, privacy regulators in Europe now have the power to fine developers "on the spot" who breach relevant laws.  For example, in the UK, the ICO has the power to issue fines up to £500K (approximately US$800K).

Some regulators, including the ICO, have further announced that "mobile" has now been moved to the top of the enforcement agenda.  In other words, the regulators do have a stick and they appear willing to use it.

When brand damage associated with any enforcement action (such actions are published) and potential civil action is thrown into the mix, this could well compound problems, or even sound the death knell, for any developer who chooses to ignore privacy compliance.

I'm an app developer - what should I do?

The ICO has published guidance for app developers to help them understand their legal obligations when collecting personal data and to ensure users' privacy.  By adhering to this guidance, developers will be much less likely to fall foul of EU/UK privacy laws and find themselves on the end of an enforcement action.

The guidance covers key issues such as how to communicate privacy related information to users, how to obtain meaningful consent from users (all in the context of a small screen), as well as how developers should keep information within an app secure.

Top tips for privacy compliance during app development include: (i) using "in-time" notifications when more intrusive data is being collected, e.g., GPS location data; (ii) using links to separate sections of a privacy policy and to keep things short and snappy (given the size of screens involved); and (iii) avoiding being legalistic in language used in privacy notices.


This app sweep by GPEN is one of the latest initiatives which suggests regulators are taking compliance issues in this area much more seriously and that a greater use of enforcement action is on the horizon.  The time is ripe, therefore, for developers to audit their data collection and data use activities and to review the policies they have in place to assess their exposure to regulatory enforcement.  Transparency and clarity are key.  Adhering to such principles should not only help keep the regulators at bay, but also have a significant effect on a developer's bottom line.

You've been fired!

By Lisa C. Earl

It isn't often that a supplier "fires" its customer, but it's not unknown. I have worked with two clients recently whose suppliers have given notice of termination without cause.

How can you avoid or, if it does happen, manage through a supplier-initiated termination?

Obviously, the best position from a customer's perspective is not to give your supplier a contractual right to terminate, except if there is an uncured material breach. However, in many negotiations in which I have been involved over recent years, suppliers are demanding a right to terminate for convenience, or a right to give notice of non-renewal at the end of an initial term, or a subsequent renewal term (which pretty much amounts to a termination for convenience).

There are any number of reasons why a supplier may require a termination right. It might be a new area of business, and they may not be able to project the business case for supporting the business beyond a limited period. It may be a line of business that is already costly to maintain, and they don't want to be locked into a business that may become unprofitable. They may already have a number of "troubled" client contracts, and be seeking an exit right for all new contracts in order to avoid being locked into a bad deal.

If you are forced to give your supplier a right to terminate for convenience (or reject a renewal), then it's important to consider what you will need to do in that circumstance. How long would it take you to move the services to an alternative provider, or to ramp up the necessary resources to bring it in-house? What information, software, tools, equipment and assistance will you need from the supplier in order to make a successful transition?

Few companies are nimble at executing the sourcing process - that is, identifying potential vendors, seeking proposals, selecting the appropriate supplier and negotiating the terms of a new agreement with them. Even under the best circumstances, the cycle can take many months to complete. Adding in the contingencies of other business demands, availability of resources, and the availability and willingness of suppliers to devote substantial time to the process, you could be looking at a year or more to be in a position to transition from an existing supplier to a replacement. If you planned and initiated the termination, you would probably start working towards that well in advance, with consideration of other projects that are being implemented within the company, seasonal peaks and troughs and other business demands. In contrast, the notice of termination from a supplier may come without warning, and will not necessarily be able to be managed to accommodate your business cycles.

The best protection you can have in a termination by the supplier is a long lead time. It's not unreasonable to ask that the supplier provide a year's (or even more) prior written notice. That will give you a reasonable amount of time to work through the sourcing process to find and contract with a replacement supplier, or to ramp up the resources and expertise to bring the services back in-house.

You should also ensure that your contract contains detailed disengagement provisions that specify the supplier's obligation to provide you with data, cooperate with you and a replacement provider, and implement a well-planned and well-executed transition. The contract should also be very clear about your rights to resources on termination. Are you entitled to software (and, if so, to source code), transfer of hardware, assignment of third party subcontracts, including leases and licenses, and can you (or your new supplier) hire key supplier employee that will ease the transition?

A solid contract should deal with all of these issues regardless of who initiates the termination, but may be more significant when termination is forced on you by the supplier.

The "Subjective" SLA - Key Stakeholder Satisfaction

By Jeffrey D. Hutchings

Quantitative measures of supplier performance in the form of service levels are critical in any outsourcing relationship.   However, they provide an incomplete picture of how well the supplier is performing and meeting the client's business and IT objectives.  A common complaint is that the service levels are green each month, but the client is dissatisfied with the supplier's performance - typically due to the supplier failing in areas that are difficult to measure quantitatively. 

To fill this gap, we recommend to our clients that a quarterly "key stakeholder satisfaction survey" be included in the outsourcing contract as a service level.  This service level is a subjective determination by the client of its level of satisfaction with the supplier's performance.  A meaningful service level credit applies if the supplier fails to achieve an acceptable rating. 

Here's how it works.  A small group of key client stakeholders - typically senior representatives within IT and the business who are impacted by the outsourcing - meet on a quarterly basis to review and rate the supplier's performance during the previous quarter.  Together, they complete a "survey" that evaluates the supplier in key areas, such as account management, operational management, financial management, knowledge management, business enablement and innovation, value of services and overall customer experience.  The completed survey will include specific comments, observations, concerns and recommendations for improvement, together with the key stakeholders' overall rating of the supplier for the quarter.  The results of the survey are then shared with the supplier's account management team and discussed as part of a quarterly performance review meeting.

The overall rating is on a scale of 1 - 5 based on the key stakeholders' collective determination of how well the supplier is meeting expectations and perceived to be adding value and contributing to client success.  A service level credit may be assessed if the supplier is failing to meet expectations on a consistent basis.  The amount of the credit is scaled based on the degree to which the supplier is failing to do so.  Like other service levels, credits are typically based on a percentage of the supplier's fees for the measurement period.

As might be expected, many suppliers initially resist a credit-bearing subjective measure of their performance.  However, our experience has been that most suppliers will ultimately accept this service level.  A key element in gaining supplier acceptance of this service level is allaying fears that the client will use this service level as simply a means to trim some money off the supplier's charges each quarter.  This often comes through a realization that the client needs to provide honest appraisals of the supplier's performance in order for this service level to be an effective tool for the client to drive improved performance and that performance improvements are far more valuable to the client's business than the amount of any financial credit the client could collect under this service level.

Experience has shown us that a key stakeholder satisfaction service level is a powerful tool for clients to focus the supplier's attention on the areas that matter most to the client and fill the gaps in what can be captured through traditional "objective" service level measures.  As a result, we think this SLA should be on every client's "top 10" list of most important outsourcing provisions and is well worth the time and effort spent on negotiations with suppliers to make it part of the contract.

FCA issues considerations on the procurement of off the shelf technology solutions (United Kingdom)

By Simon J. Lightman and Mike Pierides

In July, the Financial Conduct Authority (FCA - the financial regulatory body in the United Kingdom) issued a paper titled "Considerations for firms thinking of using third-party technology (off-the-shelf) banking solutions" (the Considerations).  The Considerations contain about five pages of checklist "Areas of interest" and related notes, which are stated to be things a firm subject to regulation by the FCA should consider when procuring 'off the shelf' technology solutions.    

When do the Considerations apply?
We view the application of the Considerations as two-fold.  First, they supplement the existing IT-related banking regulations. Second, they are intended to apply to procurements where firms might not ordinarily consider applying FCA-originating guidelines.

Supplementing existing regulation
The preamble to the Considerations says that they are separate to, and do not replace, the existing IT-related matters that are assessed by regulators.  This means they do not replace existing Threshold Conditions and the requirements set out in Systems and Controls (SYSC) 8 of the FCA Handbook (the Handbook) - these are the general outsourcing requirements, and have been in place since 2007.  

The existing rules, as their name suggests, focus on "controls".  When firms outsource critical or important operational functions - defined as those that would materially impair a firm's ability to comply with regulatory obligations - they remain fully responsible for all those obligations. The Handbook requires compliance in a number of related areas such as reporting, audit and co-operation with the regulator, all of which must be documented as part of the outsourcing agreement.

In summary, the existing rules provide a good compliance framework of general outsourcing evaluation: have you evaluated the vendor? Can you incentivise / penalise the vendor? Can you get out of the arrangement? etc. 

Where the Considerations also concern themselves with issues of general application, there is an overlap with the existing rules.  For example, Areas of Interest such as "Oversight of service provider" and "Due diligence" are to a large degree, covered by the requirements of specific controls within the SYSC 8.1 series. 

Where the Considerations take a very different approach to the existing regulations is in their technology and sourcing specificity.  Areas of Interest such as "Multi-tenancy", "Service levels", "User Administration" and others clearly demonstrate a much greater focus on issues specific to IT procurement.  The Considerations are a "ground up" set of notes relating to issues that would need to be considered by a firm's subject matter experts, rather than a more generic set of oversight controls. 

Application to different types of procurements
Typically, firms have applied the existing IT-related banking regulation to the procurement of large-scale, "bespoke" services such as IT infrastructure and hosting services.  Buying these services has usually involved contracting on the basis of the purchasing firm's terms and conditions, and with significant involvement of the various "buying" functions e.g. IT, procurement, commercial, legal, and regulatory.

The existing rules may not have been considered as applying to off-the-shelf products, as many banking products, or many of the "as a service" type third party solutions that were not part of the IT landscape in 2007.

The Considerations are intended to specifically catch and address these types of procurements; areas of interest include "Data Segregation", "Multi-tenancy", "Track record" and "Scalability".  These are topics specific to the procurement of off-the-shelf products, often remotely hosted, and sometimes provided by new entrants to the market or relatively small providers rather than the IT megaliths.

In this context, it is no surprise that the Considerations refer to "application[s] for undertaking a new regulated business activity".  The Considerations are talking to the procurement by banks (including many of the newer financial providers, known as 'challenger banks') of core banking platforms (such as Oracle Flexcube or Temenos T24) or narrower and more specialised products such as platforms that support OTC trade reconciliations or other multi-party trading platforms.

These types of procurements may well have been subject to the existing regulations, but many times the regulations weren't considered material or relevant, and many organisations did not think too deeply about the application of regulation to these products.  Unlike outsourcing agreements, contracts for off the shelf IT products are often concluded on the vendor's paper, and the "as a service" restrictions (imposing a more restrictive business and delivery model) have acted as a blocker to negotiating some of the fundamental areas that the Considerations now require a focus on.

Firms need to approach their procurement processes for off-the-shelf platforms with a view to ensuring checks against the "Areas of interest" in the Considerations.  Applying the Considerations requires activity by most of the functions of a firm involved in purchasing and implementing such platforms, including IT, procurement, legal and others.  Additionally, the Considerations should also be thought of in the context of "traditional" material outsourcings in addition to the existing rules and guidance. 

A version of this blog first appeared in Banking Technology on 8th September 2014.

BYOD: No Such Thing as a Free Lunch

By David C. Johnson, Joshua Konvisser and Meighan E. O'Reardon

It seems intuitive that, by and large, employees prefer to use their own mobile devices, carrying only a single device for personal and work purposes, and having choice over the device to be used (please don't take away my iPhone). There has also been a hypothesis that there could be cost savings for companies that allow employees to BYOD because of the ability to defer the cost of the devices and service to the employee.

In fact, maintenance of a BYOD program (we have previously reported on legal issues surrounding Bring Your Own Device and the importance of BYOD policies), including the need to manage across non-standard devices and platforms, may actually result in a BYOD program being more costly than having a standard corporate-liable program. Add to those costs a recent California ruling that requires companies to reimburse employees for wireless service. Although the case raised more questions than it answered about what level of reimbursement is required, it seems clear that companies will bear a larger portion of the cost of BYOD programs than they had previously borne.

This is not to say that companies should abandon BYOD or that there is no business case for BYOD. However, the business case analysis now needs to take into account a different, hard cost in balancing the soft benefits of BYOD, which may be harder to quantify.

FCA warns firms on use of social media to promote financial products

By Tim Wright

The UK financial services regulator, the Financial Conduct Authority (FCA), has launched a guidance consultation in order to clarify and confirm its approach to the supervision of financial promotions in social media, including the use of character-limited forms (Examples of character-limited formats are Twitter (which limits tweets to 120 characters) and Vine (which limits videos to six-second loops).  

The FCA has identified an increase in the use of character-limited social media (and social media generally) and warned of confusion among firms over the inclusion of regulatory information such as risk warnings (in compliance with the financial promotion rules) when communicating through social sites such as Twitter, Pinterest and Vine.  And, as the FCA makes clear, every communication (e.g. each tweet, Facebook page or insertion) must be considered individually and comply with the relevant rules.

The requirement for financial products to be fair and not misleading means consumers should have an appreciation of the relevant risks (through risk warnings) as well as the benefits of a particular product.  The FCA's recommendations include not promoting more complex financial products through social media channels, and using embedded infographics to include relevant information.  The FCA also confirms that use of the hashtag #ad is an acceptable way of complying with the rule that financial promotions for investment products are identifiable as such.

The FCA does not wish to block social media use but requires firms to adhere to existing guidelines.  According to Clive Adamson, FCA director of supervision, the "FCA sees positive benefits from using social media but there has to be an element of compliance" and "financial promotions, whether on social media or traditional media, should be fair, clear and not misleading."

The FCA's consultation, which will close on 6 November this year, seeks feedback from firms on its proposed guidance. Feedback may be sent by email, or by post to Richard Lawes, Financial Promotions Team, The Financial Conduct Authority, 25 The North Colonnade, London E14 5HS.  The FCA is also planning to commission research to better understand how consumers receive, use, and contextualise financial promotions via social media communications. 

The FCA is not new to social media by any means.  It published an update on financial promotions using new media in June 2010; it has deployed teams to monitor and engage with Twitter users; and it uses's Radian6 application to mine data on social media platforms and to spot general trends.

Some of parts of the proposed guidance are also be relevant to broadcast and print media. 

The EU's Right to be Forgotten: Overly Burdensome?

By Brooke L. Daniels

In May earlier this year, the European Union's top court held in favor of an individual who requested that Google remove the search results associated with his name.  In this particular case, a Spanish citizen requested that Google Spain remove an auction notice of his repossessed home from its search results, as the proceedings had been resolved for a number of years. The court held that individuals have the right to require search engines to remove personal information about them if the information is "inaccurate, inadequate, irrelevant or excessive." This precedent established the "right to be forgotten," which gives Europeans the right to require search engines to remove information about them from search results for their own names.  The ruling has not been met with universal applause, and in fact a U.K. House of Lords subcommittee recently declared the right to be forgotten misguided in principle and unworkable in practice.

Over the past few months, there has been an opportunity to see the scale of the impact of the right to be forgotten.  Since the decision Google has responded to upwards of 91,000 requests from individuals to remove links from its European search results. This number only represents 50% of the links that it has processed, with the remaining percentage of requests requiring follow-up by Google with the individual requestor in order to process the request. This creates a burden on Google for a number of reasons:

·         Google must dedicate personnel to receiving and responding to requests.  Given that the standard for removal is subjective (is the information inaccurate, inadequate, irrelevant or excessive?), Google itself has to be the arbiter of the requests.

·         Google has to maintain and bear of the cost of tools needed to track the information and remove it from its search results.

·         Even if the requested information is removed, what happens if the same information can be inferred through the analysis of Big Data? If the data is anonymized and analyzed through software analytics, it is no small task to try to reverse engineer the removal of the information. Where does Google's responsibility to scrub the information end?

This is not just an issue for companies located in Europe.  The EU Court said that "even if the physical server of a company processing data is located outside of Europe, EU rules apply to search engine operators if they have a branch or a subsidiary in a Member State which promotes the selling of advertising space offered by the search engine." 

Meanwhile, in the White House special report on Big Data issued in May earlier this year, the report recommended that "[t]he United States should lead international conversations on big data that reaffirms the Administration's commitment to interoperable global privacy frame-works." How will the right to be forgotten factor into establishing a global privacy framework? Neither Congress nor the U.S. courts have shown much of an appetite for adopting a stance similar to the European court, so there is little chance that the right to be forgotten will be established in the United States. The fact that the EU has adopted the right to be forgotten while the United States appears unwilling to walk down the same path serves to highlight some of the difficulties that we face in establishing a global privacy framework.

UK telecoms regulator issues call for input on Internet of Things

By Tim Wright

Ofcom has published a call for input, entitled "Promoting investment and innovation in the Internet of Things", regarding issues that might affect the development of the emerging Internet of Things (IoT) sector in the United Kingdom. Ofcom is the UK's independent regulator and competition authority for the UK communications industry. It regulates the TV and radio sectors, fixed line telecoms, mobile devices, postal services, plus the airwaves over which wireless devices operate. It operates under a number of Acts of Parliament, in particular the Communications Act 2003.

IoT (which is also referred to as Cloud of Things or CoT) describes the interconnection of multiple machine to machine (M2M) applications and covers a variety of protocols, domains and applications (see J. Höller, V. Tsiatsis, C. Mulligan, S. Kamouskos, S. Avesand, D. Boyle: From Machine-to-Machine to the Internet of Things: Introduction to a New Age of Intelligence. Elsevier, 2014). These technologies and methodologies underpin smart applications and embedded devices that enable the exchange of data across multiple industry sectors, such as heart monitoring implants, factory automation sensors, industrial robotics applications, automotive sensors and biochip transponders. A 2013 report by Gartner suggested that by 2020 there will be nearly 26 billion connected IoT devices.

Ofcom sees potential benefits across a range of sectors including healthcare, transport and energy, and wants to gain a better understanding of the role that it should play to ensure that the UK takes a leading role in the emergence of IoT. Given that the availability of radio spectrum will be an important issue in the development of IoT, Ofcom looks certain to have a key part to play. Ofcom's view is that, generally speaking, "industry is best placed to drive the development, standardisation and commercialisation of new technology" but, given the significant commercial benefits expected to flow from development of IoT, Ofcom is interested to learn whether it "should be more proactive; for example, in identifying and making available key frequency bands, or in helping to drive technical standards".

Input is invited by 1 October 2014.  Ofcom expects to develop a view on next steps during the last quarter of 2014. Apart from helping to define Ofcom's role, Ofcom also seeks specific inputs on:

Ø  radio spectrum requirements, such as the scale and nature of demand, suitable frequency bands and the suitability of a licensed or licensed exempt approach;

Ø  policy issues, such as network resilience and security, data privacy and the protection of commercially sensitive data; and

Ø  the need for address types, such as Internet Protocol (IP) addresses, to identify connected devices.

EU adopts new regulation on cross-border electronic identification and e-signatures

By Tim Wright

The General Affairs Council, on 23 July 2013, adopted a regulation of the European Parliament and of the Council on electronic identification and trust services for electronic transactions in the Internal Market. Until the new regulation, the E-Signatures Directive (1999/93/EC) provided the only EU rules relating to e-signatures and said nothing about trust services.  The E-Signatures Directive is to be repealed with effect from July 2016 when, with some exceptions, the new regulation will start to apply. 

The new regulation sets out rules for cross-border electronic trust services (electronic identification schemes) within the EU (the new rules will only cover cross-border aspects of electronic identification; issuing means of electronic identification remains a national prerogative. The general position at English law remains unchanged - sophisticated electronic signatures are not necessary for the formation of a binding contract) and creates a legal framework for:

Ø  electronic signatures,

Ø  seals and time stamps,

Ø  electronic documents,

Ø  electronic registered delivery services, and

Ø  certificate services for website authentication.

The regulation is broader than just e-commerce.  According to the Council's press release, the new regulation will provide "a common foundation for secure electronic interaction between businesses, citizens and public authorities.  It seeks to increase the effectiveness of public and private online services, electronic business and electronic commerce in the EU and to enhance trust in electronic transactions in the internal market. Mutual recognition of electronic identification and authentication is vital, for instance in making cross-border healthcare for European citizens a reality."

The rules provide a system for mutual recognition of electronic identification.  As the press release states, "member states are required to recognise, under certain conditions, means of electronic identification of natural and legal persons falling under another member state's electronic identification scheme which has been notified to the Commission. It is up to the member states to choose whether they want to notify all, some or none of the electronic identification schemes used at national level to access at least public online services or specific services."

Member states may decide to join the scheme for recognising each other's notified e-identification means as soon as the necessary implementing acts are in place, which is expected to take place in the second half of 2015. Mandatory mutual recognition is expected to start in the second half of 2018. 

The Council expects the new rules to give rise to opportunities for private suppliers of electronic identities.  An EU trust mark will be created to identify trust services which meet certain strict requirements.

OECD calls for increased focus on Outsourcing, IT and Supplier Risk

By Tim Wright

At a recent conference, the Twelfth Annual Corporate Accountability Conference, 12 June 2014, Cercle National Des Armées, Paris, Pierre Poret, Counsellor, Directorate for Financial and Enterprise Affairs at the The Organisation for Economic Co-operation and Development, told the audience, referring to the OECD's Risk Management and Corporate Governance report, that "too often, in the enterprise, there was little or no board-level responsibility, with the burden (and oversight responsibility) [for risk management] effectively stopping at the level of the line manager".  According to Monsieur Poret, the OECD's findings showed that companies' boards often played only a very limited role in risk management and that risk management standards were often set at too high a level, with outsourcing and supplier-related risk a key but much overlooked risk.

The report is the output of the OECD's peer review process which is designed to facilitate effective implementation of the OECD Principles and to assist market participants, regulators and policy makers.  The process covers the corporate governance framework and practices relating to corporate risk management of the 26 jurisdictions that participate in the OECD Corporate Governance Committee.  Its findings are based on general survey responses from participating jurisdictions as well as an in-depth review of corporate risk management practices in Norway, Singapore and Switzerland.  

The report, which analysed both private sector and state-owned enterprises, found that "while risk-taking is a fundamental driving force in business and entrepreneurship, the cost of risk management failures is still often underestimated, both externally and internally, including the cost in terms of management time needed to rectify the situation."  Risk governance standards tend to be very high-level.  This limits their practical usefulness, says the OECD, as they should be more operational.  And in the nonfinancial sectors, risk management is less prevalent.  "Outsourcing- and supplier-related risks ...deserve attention in both the financial and the nonfinancial sector." 

The effectiveness of an enterprise's risk management culture can be critical to an organisation's success (or failure).   The OECD lists accounting frauds (Olympus, Enron, WorldCom, Satyam, Parmalat), foreign bribery cases (Siemens) and environmental catastrophes (Deep Water Horizon, Fukushima) to demonstrate that the headlines are not restricted to the financial sector; cases where wrong-doing was compounded by corporate governance failure and deficient risk management systems, with company boards which failed to fully appreciate the risks that the companies were taking (if they were not engaging in reckless risk-taking themselves).


The typical modern enterprise has a complex supply chain with a multitude of third party and outsourced relationships.   In the absence of an adequate risk management and assurance framework, says the OECD, reliance on these outsourced and third party relationships can quickly contaminate the organisation, especially if "only lip service only is paid to important parts of the company's value chain that are outsourced".  A risk management framework should address all dependence on key suppliers or joint venture partners, with particular sensitivity to suppliers or other third parties located in countries that may follow different standards from the home country.  Companies with diverse, global supply chains should operationalise strategies to cope with the risks which result from a lack of control over their suppliers and contractors spread out across various parts of the world. 


Given high profile supplier failures such as Satyam Computer Services (subsequently rescued by Mahindra Group although not before several significant customers including Merrill Lynch (now a part of Bank of America) and State Farm Insurance terminated their contracts with Satyam), as well as headline hitting events such as factory fires and a building collapse in Bangladesh, companies should ensure that third party supplier risk management is given adequate resource and attention, including examining available insurance and other mitigation strategies such as dual sourcing, supplier assessments, contract compliance reviews, exit strategies and stress testing contractual remedies, where these have been negotiated, such as step-in rights and exit plans. 

FCA Chief announces Project Innovate: Helping Firms Meet the Technological and Regulatory Challenge

By Tim Wright

The head of the UK's Financial Conduct Authority, Chief Executive Martin Wheatley, used a speech at Bloomberg, London given on 3 June 2014 to promote the FCA's Project Innovate (the drafted text of Martin Wheatley's speech can be read at  The FCA is the regulatory body that, following reforms introduced by the Financial Services Act 2012, succeeded the Financial Services Authority. It has supervisory powers over the conduct of over 50,000 financial services firms in the UK, and authority to regulate the prudential standards of those firms not covered by the Prudential Regulation Authority. The PRA regulates deposit takers, insurers and significant investment firms.

Project Innovate is intended to allow financial services firms to develop innovative products for consumers.  This has been generally well received, with Wheatley describing Innovate as "an agreement to grant waivers to products that do not necessarily follow FCA guidance to the letter" where firms can show better outcomes for consumers.  Part of the driving force behind Innovate, which will resonate with business leaders across the UK, is to prevent good products from drowning in the "overwhelming red tape that is inevitable as we introduce more regulation, not just at UK but at a European level."

Describing the need for regulators to keep pace with new technologies, rather than - as present - running to catch up, and a desire for a regulatory environment that supports innovation rather than acting as an entry barrier, Wheatley singled out mobile banking, online investment and money transfer as priority areas, and the emergence of London-based innovative companies such as WorldRemit, Monitise, TransferWise and Nutmeg. Wheatley went on to cite digitalisation, big data analytics, venture capital, virtual currencies, crowd funding and peer-to-peer as important, transformational areas.

Smaller firms and start-ups can, in particular, be expected to benefit from the Innovate approach which will encourage collaboration with the FCA in order to develop new technologies that are compliant from day one, with a regulatory environment that, instead of acting as a "drag anchor" supports innovation and encourages the "brightest and most innovative companies to enter the sector". Whether this marks a shift in the FCA's approach to digital currencies, such as bitcoin, remains to be seen, with the regulator so far having kept a wide berth.

It's probably too early to call a trend (more evolution than revolution) but this initiative shows promising signs, with Wheatley recognising, and taking steps to bolster, London's leading position in the European market in financial technology (Wheatley cites growth of global investment in financial technology having tripled over the 5 years to 2013 up to $2.9bn, with UK and Ireland the fastest growing incubators, developing at an annual rate of 74% since 2008, compared with 23% in Silicon Valley).  A single paper and a wider FCA consultation on potential handbook changes are due later this year.  In the meantime, the FCA has started to engage with business including a number of start-ups and organisations such as Tech City and Level 39. It has "opened a hub" in its policy team to pull together expertise and provide support to advise firms developing new models or products on compliance and how to navigate the regulatory system, and by "looking for areas where the system itself needs to adapt to new technology or broader change - rather than the other way round". Wheatley also foreshadowed that a single paper combining all of these initiatives, and wider FCA consultation on potential handbook changes, are due later this year. 

The UDAAP Trap: How Financial Institutions can Avoid Penalties when Using Third Party Services

By James W. McPhillips and Vipul Nishawala

In Part 1, we noted that financial institutions could find themselves potentially liable for committing an alleged Unfair, Deceptive, or Abusive Act or Practice (UDAAP) as a result of the actions of certain types of external service providers, particularly those that interface directly with customers.  In this Part 2, we will discuss how financial institutions can mitigate the risk of UDAAP enforcement actions through their contracting strategies with their service providers.

A New Wrinkle of Risk

In some ways, the CFPB's UDAAP authority resembles other regulatory regimes in that it places compliance obligations on both the issuer of the product as well as the third-party service provider that helps effectuate a transaction involving such a product.  For example, export control laws place Office of Foreign Assets Control compliance obligations on both parties to a transaction.  Data protection laws apply both to the controller as well as the processor of data.  HIPAA protections for health information apply to the covered entity and its business associates.

In other ways, however, the CFPB's UDAAP authority differs from other regulatory regimes because it expressly imposes upon a financial institution an affirmative obligation to supervise closely the behavior of its service providers.  While some other regulators may also impose express obligations (e.g., Office of the Comptroller of the Currency), in many other regulatory contexts, any required supervisory role is typically either less onerous and/or only implied by the regulatory agency. 

Of course, it is an outsourcing best practice for a customer to have good management and oversight over its service providers, but the CFPB's requirements go further.  Indeed, this supervisory obligation may even undercut a financial institution's rationale to outsource certain functions in the first place and lead an institution to forego pursuing the outsourcing relationship during an initial risk assessment if the institution believes the potential service provider could expose the institution to UDAAP liability.

All outsourcing relationships involve some level of risk.  Depending on the nature of the services, a bank may be handing over sensitive data, management of key processing functions, or responsibility to keep IT infrastructure safe and secure.

The CFPB, however, appears to have added a new wrinkle of risk to what would otherwise be considered a "standard" level of outsourcing risk - for certain services related to consumer financial products or services, if a financial institution's service provider engages in behavior that the CFPB finds unlawful under its UDAAP authority, then the financial institution itself is potentially liable for the conduct of its service providers and could be subject to substantial penalties.

A Delicate Balance

But this risk is not insurmountable.  A thoughtful vendor management/contracting strategy can mitigate a financial institution's risk by incorporating UDAAP obligations into its service provider contracts and sensibly allocating the risk between the parties.  In addition to addressing the risk responsibility in the contract, the financial institution should consider establishing a service provider monitoring and governance framework that expressly addresses UDAAP risk. 

Financial institutions will want to implement specific solutions (which may even vary service provider to service provider) to ensure that it sufficiently protects itself while at the same time not being too heavy handed with its business partner.  A financial institution and its counsel will need to maintain that delicate balance between seeking the necessary protection and creating obligations that can get in the way of doing business.

With this balance in mind, there are two high-level procedural approaches a financial institution's counsel may want to consider.

Single Purpose Agreement

One method a financial institution could employ is to execute single purpose "UDAAP Agreements" with all of the relevant service providers across the enterprise.  This approach is analogous to a company requiring its service providers to enter into NDAs or (for HIPAA covered entities) Business Associate Agreements.

Such an initiative will likely take a fair amount of effort, but it could also bring significant benefits.  First, the institution is starting out with standard terms.  Assuming counsel is successful in limiting negotiation, then all the relevant service providers are signing up to more or less the same obligations, which creates consistency with respect to meeting the CFPB's duty to supervise.

Second, this approach gives the institution room to be specific about what is required.  Some service providers may not know their precise obligations with respect to the prohibition on UDAAP, and having such clear obligations may be beneficial to the financial institution in showing the CFPB that the institution is taking its affirmative obligations seriously.

Finally, with respect to those agreements already in place, a single purpose approach avoids having to reopen and amend the existing terms.  With respect to new agreements being negotiated, the single purpose approach allows the institution to segregate the risk terms (e.g., liability and indemnities) from the underlying commercial transaction, which may result in more efficient negotiations.

Integrate the Terms

Another approach is to integrate the UDAAP obligations into the underlying service provider contract.  Integrating the terms into an underlying agreement may enhance the institution's leverage because each party has the "let's get a deal done now" mentality if it is a new contract.

Integration of the terms into the underlying transaction is also similar to the way many outsourcing contracts deal with other regulatory issues like data protection and export controls, so the approach is unlikely to surprise the service provider.  Taking this approach may result in negotiating "fewer words" because some aspects of compliance (e.g., reporting and audit rights) may already be captured by other portions of the contract.

For those outsourcing transactions that, in the grand scheme of things, present a comparatively lower risk to the financial institution, a single purpose agreement may be too much when simpler integrated terms would suffice.  Compliance obligations with such low-risk transactions may simply be handled in a standard "compliance with laws" section in the agreement.

With respect to medium-risk to high-risk transactions, however, an institution will want to guard against taking a simplistic approach to integration.  In other words, the institution should resist trying to address UDAAP by simply inserting a "compliance with Dodd-Frank" obligation or "compliance with bank policies" obligation into the contract.  Although the service provider may be more agreeable to closing the issue this way, the actual obligations to prevent UDAAP violations are not spelled out.  If CFPB examiners come looking for UDAAP violations, the bank may not have a good story to tell about its good faith effort to mitigate risky UDAAP behavior with that service provider.

Key Negotiation Points

In addition to deciding on the best approach as described above, the financial institution will need to able to negotiate the substantive UDAAP terms.  Of course, a bank's negotiation strategy is highly dependent on the nature of the deal, the leverage each party has, and whether the particular relationship is high or low risk.

The financial institution should focus on the following key areas of risk when negotiating UDAAP terms.

1.             Liability.  As we noted in Part 1, CFPB enforcement actions to date have resulted in fines and restitution obligations that could run into the hundreds of millions of dollars.  Such penalties likely would vastly exceed an agreement's standard liability cap on direct damages.  Therefore, a bank's counsel should attempt to exclude such regulatory fines from any liability caps. 

2.             Indemnities.  A full indemnity from the service provider for regulatory fines may also be appropriate depending on the nature of the services, particularly for high-risk services that directly interface with an institution's consumers. 

3.             Termination.  An institution should also negotiate flexible termination rights with the service provider, so that the institution can exit a relationship in case the service provider engages in prohibited UDAAP activity.  CFPB examiners will likely look favorably upon an institution with such flexible termination rights.

4.             Operational Oversight.  In addition to the traditional risk terms described above, other business and operational terms warrant consideration as well.  To ensure that the institution is able to exercise its heightened obligations to monitor and supervise, it should seek frequent reporting and good recordkeeping practices from its service providers.  Strong audit rights on behalf of the institution are also recommended by the CFPB.  A robust governance framework with the service provider may also be an important part of the financial institution's ongoing monitoring and compliance efforts.

5.             Performance Incentives.  In its guidance documents, the CFPB has noted that consumer complaints can serve as a leading indicator as to whether a UDAAP has occurred.  Not only should an institution look to implement a process for how customer complaints get analyzed and reported up to the bank, but also the institution should consider tailor-made service levels for incentivizing the service provider to limit such complaints in the first place.  Implementing such proactive performance measures will likely show CFPB examiners that the institution is looking to curb violations before they occur. 


Implementing such a contracting strategy is an essential component of any financial institution compliance program.  Among other things, it likely will go a long way in showing the CFPB that a good faith effort has been made to comply with UDAAP rules and ultimately help the financial institution avoid enforcement actions.

The Internet of Things--Avoid Getting Eaten by the Wolf in Sheep's Clothing

By Joshua Konvisser

With the number of (internet) connected devices rapidly surpassing the number of internet people (actually, all people whether or not connected), we take this opportunity to explore some of the legal complexity brought about by all of this connectivity.
First, some background:

This means that with the current population, we have the ability to address over 47,000 addresses/devices per person

The Sheep's Clothing
The Internet of Things has some wonderful benefits. For example:

  • You can now remotely control your thermostat to save energy;

  • You can monitor systems in your house when away to protect its physical security;

  • Companies can monitor the flow of goods and inventory through their systems;

  • Utilities can manage the flow of resources based on supply and demand through smart metering;

  • Distributers can monitor the movement of their fleets;

  • Municipalities can monitor flow of traffic on streets and availability of parking spaces;

  • And the list goes on as far as our imagination

The Wolf
But . . . the Internet of Things also creates huge amounts of information. And with that information, come all of the risks and challenges of having information.
Companies or other entities collecting or processing information need to protect the confidentiality of that information. Information about the things of individuals can disclose significant information about that individual.

For example, the GPS tracking on a cell phone may be used to tell the owner of an App where the person is going which could disclose private, or even Protected Health Information--imagine, if you will, a company that uses the GPS tracking to monitor the movement of its distributed sales force and learns that one of the sales personnel has been frequenting a certain kind of medical establishment.

Entities need to understand what information they may obtain, and need to develop clear policies and manage expectations of the users. In some countries, even having employees consent to such monitoring may not be enforceable given the "coerced" nature of employee "consent."

This gets even more concerning when companies are monitoring their customers rather than their employees. Although the monitoring may be for the most well-intentioned purposes, the company still possesses sensitive data. For example, the App on smartphones that tracks where people exercise using GPS also knows when people are exercising far from home. If someone was able to hack into that data, they would know when was a good time to break into the home or harm the user's family.

In addition to privacy concerns, there are also more direct employment concerns. Internet connected devices make it easier for employees to work whenever and wherever. This sounds great, but this also means that hourly employees may be encouraged to work outside of their normal work hours. Not only does the device facilitate this extra work, it also reports on it. There are reported cases where this has led to companies incurring unanticipated overtime liability for hourly employees responding to emails from their smartphones.

The Internet of Things also facilitates more direct monitoring--both by private companies and by the government.

Having this data also makes an entity subject to inquiries from law enforcement and in litigation. This volume of data compounds the classic eDiscovery problems which can drive huge costs in terms of gathering, reviewing, and providing data. In addition, a company may be faced with a decision of incurring the legal expense of defending a request for information to protect the privacy of its customers, or sharing the information and affecting its reputation with the customer-base.

Don't Get Eaten
So, what is the purpose of this blog post? The move to the Internet of Things is both unavoidable and, by-in-large, beneficial. By all means, get on board, or be left behind. But entities should be thoughtful and understand some of the associated risks so that they can be built into the decision-making process. By understanding the legal risks, systems can be designed to generate great benefits while accommodating legitimate legal concerns. Advanced awareness and planning can empower those who embrace the Internet of Things, rather than allowing them to be blindsided when it is too late.

Database Marketing Outsourcing

By Jeffrey D. Hutchings

Database marketing outsourcing is a strategic transaction for retailers. This type of outsourcing can facilitate the integration of diverse marketing channels e.g., web, social media, catalog and in-store sales) and enable more targeted and effective marketing to consumers.

Database marketing encompasses a potentially broad array of services, including:

  • Implementation and hosting of a CRM database marketing solution;
  • Data cleansing, matching, updating and enrichment;
  • Data licensing;
  • Data mining and analytics/reporting; and
  • Campaign management and analysis.

This is the second of two articles highlighting some key business and legal considerations in these transactions. In the first article I discussed scope, sizing and pricing considerations. In this article I will discuss performance and data considerations in connection with database marketing outsourcing.

Performance Considerations

There are a variety of different measures of supplier performance depending on the specific services to be provided by the supplier and the supplier's solution for providing those services. Typical service level measures include the following:

Solution Availability - This service level measures the availability of the components of the supplier's database marketing solution that are to be accessed and used by the customer in connection with the services, such as reporting datamarts. Similar to traditional IT measures of system availability, this service level holds the supplier accountable for the solution being available to the customer's authorized users without material degradation in performance during scheduled hours of operation (excluding scheduled maintenance windows). The supplier is responsible for the application, infrastructure and network elements of the solution managed by or on behalf of the supplier. Availability is normally in the 99.0 - 99.5% range.

Database Update Processing - Database marketing services typically involve the supplier updating customer data through cleansing, appends, enrichment and refreshes in accordance with a defined schedule. As a result, there should be one or more service levels that measure the supplier's successful completion of the scheduled updates in a timely manner. This service level is typically measured either as the percentage of scheduled updates that are completed on time during the measurement period (e.g., monthly or quarterly) or in terms of a permitted number of misses over the course of a contract year. This service level is important in ensuring that the most up-to-date information about consumers is used in designing and implementing marketing campaigns and strategies.

System Response Times - This service level measures the response time of the supplier's system to queries executed by the customer's marketing department or other users. Because queries can vary considerably in terms of complexity, it is necessary to either classify queries by their complexity level (e.g., high, medium and low) with different response times for each classification or pre-define a limited set of common queries that the customer wants to measure (e.g., shopped in the past 12 months, generation of do not mail list) with a specified response time for each query. Failure to meet the required response times for a specified percentage of queries can trigger a service level failure or, alternatively, trigger a severity 1 or 2 incident which needs to be resolved within the required resolution time.

Marketing Campaign Execution - If the services include marketing campaign support, customers may want to include service levels that measure the supplier's timely completion of its responsibilities in connection with the campaigns. For example, the service level could measure the delivery of fulfillment files to direct mail or email vendors in a timely manner. The service level measure will need to be defined based on the specific roles and responsibilities of the supplier and customer in executing marketing campaigns.

Incident Management - In addition to the measures described above, there should be a set of incident management service levels that measure the supplier's effectiveness in responding to and resolving issues that adversely impact the services. Similar to tradition IT measures, incidents are classified by severity level based on the impact to the customer's business and the services.

Key Stakeholder Satisfaction Survey - While the quantitative measures of supplier performance described above address many important aspects of the supplier's performance, they do not capture all aspects of performance that are critical to a successful relationship such as the quality of individuals assigned to the customer's account and the flexibility and customer-focus of the supplier in addressing service and change requests. It is not uncommon for a customer to be unhappy with the supplier's performance even though the supplier is consistently meeting the quantitative measures of performance. As a result, we recommend that customers negotiate a service level that provides for a quarterly evaluation by key customer stakeholders (e.g., CMO, CIO) of the supplier's performance. A modest portion of the supplier's fees should be at risk each quarter if it fails to achieve an acceptable score. Because stakeholder satisfaction is a subjective measure, the first reaction of many suppliers is to resist such a measure. With some effort, however, suppliers can often be persuaded that this is a rationale contract management tool which if used correctly can also benefit them by providing frequent and candid feedback on their customer's perception of their performance.

Data Considerations

Database marketing services involve suppliers managing sensitive consumer data on behalf of the customer. Data typically comes from two sources: (1) the customer's database containing consumer contact, demographic and transactional information which is to be hosted and maintained by the supplier and (2) the supplier's (and/or a third party's) databases of consumer contact and demographic information that are to be used to improve the accuracy and enrich the customer's database. As a result, there are several dimensions to addressing data related issues ranging from data license rights to data protection to the return of customer data at the end of the outsourcing contract.

Licensing of Supplier Data - Customers should give careful consideration to the terms of any data licensed by the supplier in connection with database marketing services. If customers anticipate using any supplier furnished data in connection with co-branding or joint marketing with business partners, they will need to secure express license rights for those activities. In addition, suppliers typically license their data for specified terms (e.g., annual) that expire at the end of the services relationship. However, portions of the data licensed from the supplier may include updated consumer contact information (e.g., new postal or email address, new telephone number) that will be integrated into the customer's consumer records. This information cannot readily be removed from those records and it is not realistic to expect customers to revert to a consumer database with outdated information. As a result, customers should secure unlimited perpetual licenses to such data. To the extent that the customer's license to any data furnished by the supplier will terminate at the end of the services relationship, the supplier should be required to remove such data at no additional charge to the customer without adverse impact to the returned data.

Supplier Use of Customer Data - The outsourcing contract for database marketing services should include appropriate restrictions on the supplier's use of the customer's data. As a general matter, suppliers should agree to use customer data solely for the purpose of providing services to the customer. Suppliers may request the right to use de-identified, aggregated data for various purposes such as making improvements to their services generally and for research and publishing on industry trends. Before granting this right, Customers are advised to carefully consider whether any of the proposed uses of this data could potentially reveal sensitive competitive information and to prohibit those uses. For example, if customer is dominant in a particular industry segment, the supplier's publication of trends in that segment could provide competitors valuable information about the customer's performance.

Protection of Customer Data - The consumer data hosted and stored by the supplier in a database marketing service contain highly sensitive personally identifiable information. As a result, customers should secure strong contractual commitments from the supplier regarding the protection of that information. These commitments should include:

  • a comprehensive security program that complies with all applicable data privacy / security laws and regulations and satisfies the customer's internal security policies;
  • ISO 27001 certification;
  • annual SOC 2, Type 2 reports, including prompt remediation of deficiencies indicated in the reports;
  • data encryption;
  • customer approval of supplier facilities used in delivering the services; and
  • prompt notice and full cooperation in addressing any security events.

If the supplier will not agree to unlimited liability for breach of its security commitments, the limitations on liability should provide for a significantly higher cap on liability than the normal cap for performance failures. In addition, the supplier should be responsible for all reasonable costs incurred by customer in addressing security breaches, including investigation, forensics and legal costs; regulatory fines and penalties; and call center and credit monitoring costs.

Return of Customer Data - When the outsourcing contract with the supplier comes to an end, the customer will need to migrate the consumer data hosted by the supplier to another database marketing solution. The outsourcing contract should include commitments from the supplier to assist the customer with this transition. This should include a commitment by the supplier to return all of the customer's data in an industry standard format (e.g., delimited ASCII), together with configuration descriptions and other documentation relating to the data. Absent these commitments, the customer may find that there are significant operational and financial hurdles in attempting to terminate its relationship with the supplier or negotiate favorable renewal terms.

How Organizations Can Benefit from "Cybersecurity as a Service"

By Roger C. Roy Jr.

Join two of our SourcingSpeak bloggers, Joe Nash and Meighan O'Reardon, as they explore "Cybersecurity as a Service," an emerging concept that allows companies to more centrally manage cybersecurity. They will highlight how these services may be leveraged by corporations looking to mature their cybersecurity capabilities and address cybersecurity risk from a legal, operational and management standpoint. Topics that they will cover include:

  • How can these cybersecurity services be leveraged by an organization?
  • How should organizations be structuring themselves to best manage cybersecurity, and ultimately to limit their cybersecurity risk profile?
  • What is the preferable approach to create a comprehensive program for cybersecurity management? In-house, third-party sources or both?
  • What are some of the legal ramifications companies must keep in mind?

Tuesday, June 3, 2014
noon - 1:00pm ET/ 9:00 - 10:00am PT/ 5pm - 6pm GMT


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