In March, 2016 the U.S. Consumer Financial Protection Bureau (“CFPB”) issued a Consent Order against Dwolla Inc., an online payment platform, for deceiving consumers about its information security practices. The CFPB levied a $100,000 civil monetary penalty against the company, a first for the CFPB. What is particularly notable is that there was no evidence that the payment processor had experienced a breach or data security incident of any kind. Also notable were the significant new compliance obligations, including requiring Dwolla to perform regular risk assessments and annual third-party cybersecurity audits for the next five years. While Canada has different privacy and consumer protection regimes, the lessons from the Dwolla case point to a new direction in enforcement approaches.

Background

Dwolla launched in 2010 and is a competitor to PayPal and other similar online payment networks, allowing users to send money to one another without paying bank or money transfer fees. It also provides white-labelled payments services to financial institutions.

According to the CFPB, Dwolla had represented to consumers that it: (1) complied with the Data Security Standard created by the Payment Card Industry (“PCI”) Security Standards Council; (2) encrypted and stored securely all of consumers’ information and all sensitive information that existed on its server, and (3) exceeded industry standards for information security.

In fact, according to the CFPB, Dwolla was not PCI compliant; did not “encrypt all sensitive consumer information in its possession”; and “failed to employ reasonable and appropriate measures to protect data obtained from consumers from unauthorized access” (specifically noting that information such as 4-digit PINS; Social Security numbers; bank account information; and digital images of driver’s licenses were not encrypted). The CFPB also found fault with Dwolla’s employee training and education practices.

The Order

The Consent Order restrains and enjoins Dwolla from making further misrepresentations regarding its data security practices and requires Dwolla to pay a $100,000 civil penalty. Notably, the company has been order to undertake a comprehensive (and expensive) compliance efforts, including that Dwolla:

  • Develop and maintain a written, comprehensive data security plan and implement 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, and adjust the data security program in light of the results of these assessments;
  • Conduct regular, mandatory employee training on the Company’s data security policies and procedures
  • Develop, implement and maintain an appropriate method of customer identity authentication at the registration phase and before effecting a funds transfer; and
  • Obtain an annual data-security audit for the five-year term of the Consent Order from an independent, qualified third-party (acceptable to the CFPB), using procedures and standards generally accepted in the profession.

Dwolla defended its cybersecurity practices in a blog post, noting specifically that “[s]ince its launch over 5 years ago, Dwolla has not detected any evidence or indicators of a data breach, nor has Dwolla received a notification or complaint of such an event”.

Implications and Analysis

While this is a U.S. agency, there are strong parallels within Canada and organizations should be mindful of the tendency of U.S. developments to influence actions in Canada.

For instance, the Office of the Privacy Commissioner of Canada (“OPC”) under Canada’s Personal Information Protection and Electronic Documents Act, SC 2000, c 5 (“PIPEDA“) has the power to conduct audits of an organization’s personal information management practices (section 18). This power is the equivalent to the investigatory power exercised by the CFPB in this case. Note that this is a broad power triggered only by the Commissioner’s “reasonable belief” that an organization may have sub-par practices with respect to the protection of personal information.

Under the recent amendments to PIPEDA, the OPC now also has the power to enter into a compliance agreement with an organization, similar to the CFPB’s consent order power. A compliance agreement may contain any terms that the Commissioner considers necessary to ensure compliance. If the compliance agreement is violated, the OPC may apply to the Court for an Order compelling the organization to comply. Practically, a compliance agreement will subject an organization to the ongoing scrutiny of the OPC.

In addition, the Canadian federal government is currently in the process of reviewing the regulation and oversight of Canadian retail payment systems. In its recent consultation paper in respect of retail payment systems, Balancing Oversight and Innovation in the Ways We Pay: A Consultation Paper, the federal government specifically identified security as a key operational risk in retail payment systems and referred to cybersecurity policies and guidelines as an example of potential oversight measures. It will be interesting whether the federal government moves to mandate minimum cybersecurity compliance requirements in the payments industry, particularly if industry players are found to not be following strict information security practices.

Future Directions for Enforcement in Canada

Mandatory Outside Cybersecurity Audit. The CFPB’s Consent Order ordered Dwolla to undertake semi-annual risk assessments, to retain an independent third party to perform an annual cybersecurity audit for the next five years, and to submit documents to the CFPB for review. These demands exceed the requirements of the PCI Data Security Standard, as well as the requirements of any federal or provincial privacy regime.

No industry regulatory body in Canada has yet required an organization under its purview to have an outside cybersecurity audit. Certainly audited (or at least standards-based) cybersecurity efforts have been suggested as a best practice – see, for instance, the voluntary risk-based Cybersecurity Framework put forth by IIROC – a set of industry standards and best practices to help IIROC Dealer Members manage cybersecurity risks (CyberLex post on this topic here).

Arbiter of Standards. While it was the misleading statements by Dwolla that were the focus of attack by the CFPB, in so doing, it determined that Dwolla was not PCI-DSS compliant and thereby appointed itself an arbiter of PCI compliance. While the PCI Data Security Standards are focused on integrity of payment card processing and not personal information per se, the outcome here suggests that the where an entity has made statements that it meets certain standards, the regulator may be willing to interpret those standards for its own purposes.

Creator of Extra-Legislative Standards. Through its criticism of Dwolla’s cybersecurity practices, the CPFB establishes what it believes to be the elements of a “reasonable and appropriate” cybersecurity program (e.g., written data security plan, etc.). None of these should come as a surprise to Canadian organizations dealing with personal information in the course of their commercial activities as they largely reflect the privacy principles (and requirements) articulated in PIPEDA. However, it does raise a question of whether [a regulator can require more than what is required by the legislation].

Misrepresentation: Not yet tested in Canada is the role of misrepresentation, which would come under the jurisdiction of the Competition Bureau rather than the OPC. The Competition Act prohibits false or misleading representations in a material respect. If a representation could influence a consumer to buy or use the product or service advertised, it is material. To determine whether a representation is false or misleading, the courts consider the “general impression” it conveys, as well as its literal meaning. Conceivably, an organization which over sells its privacy and cybersecurity practices (including in its online privacy policy) to the extent that it affects the decisions of consumers to use that organizations products or services could find itself not only in violation of Canadian privacy laws, but the Competition Act as well.