The new rules take effect on 7 Feb 2013, and have been designed primarily to spell out to consumers exactly how much they are paying in fees and taxes when they send money outside the US.
However, the need to comply with the new rules is forcing major changes on the US currency trading industry, which, say foreign observers, has lagged behind other countries in terms of technology, particularly when currencies other than US dollars enter into the equation. The US sent an estimated $51bn abroad in 2010.
The rules on are among a package of new regulations that are being pressed on the American financial services industry by the Dodd-Frank Act, a massive piece of legislation that was drawn up in response to the 2008 financial crisis and signed into law by President Obama in 2010.
James Sellon, one of the partners in Maseco, the London-based wealth manager that specialises in looking after expatriate Americans, says he and his Maseco colleagues are “fully supportive of these types of measures in theory”, noting that for a decade there has been “a huge amount of confusion” surrounding international wire transfers out of the US.
“However, as is so often the case in these things, the devil is in the detail, and at the moment it is looking a bit like they’re using a sledgehammer to crack a nut,” he adds.
“A watered-down version [of what they’re doing] might be more appropriate.”
That said, Sellon said he is familiar with numerous cases in which the antiquated US systems for making money transfers have led to errors that have resulted in clients being forced to pay extra fees when, for example, the money arrived on the wrong day, or in the wrong amounts.
Mistakes in money transfers due to the use of old-fashioned methods is also cited as a problem by Nasir Zubairi, director of marketing at the Currency Cloud, a London-based online currency trading platform.
He too believes the US is right to seek to improve standards and transparency in its money transfer industry, but notes that the American banking industry is likely to fight the changes.
“The traditional FX industry’s power, and thus its profitability, comes from its lack of transparency,” Zubairi says.
“It is one of the few markets that is still totally controlled by banks – there is no central exchange for FX that provides the transparency of other capital markets, such as equities.
“The banks will fight tooth and nail to ensure this market structure will not change, and have formed a powerful lobby against Dodd-Frank regulatory reform.”
Consumer Financial Protection Bureau
The organisation tasked with overseeing the implementation of the new US rules on money transfers is the Consumer Financial Protection Bureau, a new federal agency set up in 2011 to enact and enforce the Dodd-Frank reforms. The new “rules to protect consumers who send money electronically to foreign countries” are among the first of the Dodd-Frank measures the CFPB will handle.
According to the CFPB’s website, companies offering to transfer money abroad must disclose certain information before the consumer hands over his or her money to pay for the transaction: The exchange rate, all fees and taxes, and the amount of money to be delivered abroad.
Companies handling such transfers “must also provide a receipt or proof of payment that repeats the information in the first disclosure,” the CFPB says.
“The receipt must also tell consumers the date when the money will arrive.”
There are other rules as well, including a requirement that the disclosures be in English and “sometimes” in other languages; that consumers have 30 minutes, and sometimes more, to cancel a transfer, and provisions for how mistakes are to be handled.
In the US, banks argue that the obligation to provide clients with information on the fees and taxes they will be charged at the other end of a currency transfer will prove difficult if not impossible to meet.
To see the new rules for US money transfers on the CFPB website, including links to a 117-page pdf of the final draft of the new Remittance Transfer Rule, click here.
