It has always been a common practice for financial institutions’ regulatory compliance policy manuals to contain a section titled ‘Prohibited Customers.’ These sections listed what were considered by the bank to be unwanted customer types, such as casinos, marijuana-related businesses, dealers of precious metals, and dealers in the sale or distribution of firearms. Decisions by banks to deny services to these customer types were often based on economics; to mitigate the bank’s risk profile and consequential compliance cost associated with the onboarding and monitoring to detect and report suspicious activity. But decisions were also influenced by ethical standards if the nature of the business of certain customer types may not align with the values of a bank’s board of directors and senior management team.
Florida House Bill 3 (HB3) is poised to bring substantial changes to the customer onboarding process of the state’s financial institutions, impacting a wide range of entities, from “qualified public depositories” to money services businesses and consumer finance companies. The legislation introduces key provisions that now necessitate individualized risk assessments and prohibit decision-making practices deemed “unsafe and unsound” as defined by the law. As Florida’s financial institutions adapt to these changes, they must understand the implications and compliance requirements laid out in HB3 to ensure full compliance.
Key Provisions of House Bill 3
Individualized Risk Assessments: Under HB3, financial institutions must now make determinations concerning the provision or denial of services based on individualized risk factors specific to each current or prospective customer. This approach mandates a personalized assessment for customer approval.
Prohibition of Unsafe and Unsound Practices: The bill establishes a new standard that deems certain customer onboarding practices as “unsafe and unsound.” Financial institutions are now prohibited from refusing services, canceling services, or discriminating against customers based on a range of criteria.
House Bill 3 prohibits financial institutions from basing customer-service decisions on any of the the following criteria:
- Political Opinions, Speech, or Affiliations: Customer approval cannot be influenced by a customer’s political opinions, speech, or affiliations.
- Religious Beliefs, Exercise, or Affiliations: Discrimination based on religious beliefs, exercise, or affiliations is not permitted.
- Non-Quantitative, Impartial, and Risk-Based Standards: Any other criteria that is not quantitative, impartial, and risk-based.
- Social Credit Scores: The use of social credit scores is banned, including considering factors like political opinions, religious beliefs, lawful firearm ownership, engagement in firearm-related activities, fossil fuel industry related businesses, and more.
Legislative and Political Background
On February 13, 2023, Florida Governor Ron DeSantis (R), joined by Florida Senate President Kathleen Passidomo and House Speaker Paul Renner, announced the legislation for the following purpose: “to protect Floridians from the woke ESG (environmental, social, and governance) movement that continues to proliferate throughout the financial sector.” The legislation’s sponsors sought to “protect the investments of Floridians and the ability of Floridians to participate in the economy.” On February 20, 2023, Florida Representative Bob Rommel (R-Naples) introduced Florida House Bill 3 in the Florida House of Representatives (the Bill) by amending certain Florida statute provisions relating to the Florida financial sector.
On May 2, 2023, the final bill, having passed the Republican-led Florida Senate, was approved and signed by Governor DeSantis and became effective July 1, 2023..
Implications for Florida’s Financial Institutions
Non-compliance with the new “unsafe and unsound practice” standard or an annual attestation requirement would be considered a violation of the relevant Florida statute and could result in sanctions and penalties for the financial institution. Furthermore, HB3 empowers the Attorney General and the Commissioner of Financial Regulation to enforce these provisions to the fullest extent of the law.
Notably, engaging in an “unsafe and unsound practice” would also violate the Florida Deceptive and Unfair Trade Practices Act (FDUTPA), which is a significant departure from current Florida law. Florida-licensed financial institutions are currently exempt from the FDUTPA.
The passage of HB3 poses significant challenges for compliance teams within Florida’s banking sector to conduct and document reasonable quantitative, impartial, and risk-based assessments on customers that the bank wishes to deny services in order to comply with the new law. As institutions navigate the transition to the enhanced regulatory oversight, compliance officers find themselves on the frontlines. By adopting a proactive risk management approach and quantifying the increased compliance costs in systems and personnel, compliance teams could effectively manage the requirements of HB3. Methodically implementing the precise regulatory steps will aid banks in integrating the law’s requirements across its operations.