QUESTION
Our company has signed up marketing people who offer digital marketing. Our CEO is adding experts in artificial intelligence and behavioral analytics to our marketing department. As the Compliance Manager, I am concerned.
I came here from an online lender, so I am not naïve about online marketing tools. Digital marketing is mostly a fancy name for online marketing, meaning the leverage of numerous channels such as resources for behavioral modeling, search engines, social media, all kinds of websites, emails, text messages, and a host of multimedia. This is a veritable forest of minefields governed by regulations.
I get it! We need digital marketing for brand awareness and to generate business. Most consumers these days expect a branded, online presence. But the stakes are high, especially because the ability to police digital marketers is ridiculously labor intensive.
However, the CFPB has recently been making lots of noise about digital marketing providers. It is going to hold digital marketing providers liable for UDAAP violations – and now we’re going to employ these people right here in my company! I’m worried about the implications. I need some insight into what to expect.
What are the implications for hiring digital marketers or using digital marketing providers?
ANSWER
On August 10, 2022, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule that addresses when digital marketing providers who commingle the targeting and delivery of advertisements to consumers are covered by the Consumer Financial Protection Act of 2010 (CFPA).
Under the interpretive rule,[i] when digital marketing providers are materially involved in a covered person’s content targeting, the digital marketing provider does not meet the time or space exception to the service provider definition. As a result, those digital marketing providers would typically meet the definition of service provider under the CFPA and be subject to that law’s consumer protections.
Let me dig a little deeper and provide some background and context.
Section 1002 of the CFPA defines the term "service provider" and sets forth two exceptions to that definition. Our focus is on the time and space exception.
Time and Space Exception
Under one of those exceptions, a person is not a service provider solely by virtue of such person offering or providing to a covered person time or space for an advertisement for a consumer financial product or service through print, newspaper, or electronic media.
When digital marketing providers go beyond traditional advertising, such as by using algorithmic models or other analytics, they are typically covered by the CFPA as service providers. The interpretive rule explains that the time or space exception does not cover digital marketing firms that are materially involved in developing content strategy.
Many digital marketing providers play a dramatically different role in consumer advertising than traditional media sources like print newspapers or radio stations. Many digital marketers target and deliver ads to specific consumers using sophisticated analytical techniques, including machine learning (i.e., artificial intelligence, or “AI”) and behavioral analytics, to process large amounts of consumer data. In other words, many digital marketers aggregate and analyze immense amounts of granular consumer data and then use that data to determine what advertisements to provide to specific consumers at what times.
The CFPB’s interpretive rule explains that digital marketing providers commingle the service of targeting and delivering advertisements with the activities of traditional media sources in providing airtime or physical space.
Digital marketing providers obtain data from various sources, including, but not limited to, data collected directly from consumers, for instance, when registering for an account or conducting a search query into a search bar.
Furthermore, digital marketers may harvest a wide variety of consumer data by monitoring and tracking a consumer’s web activity, including their browsing history, online activity, and even geolocation. There is a scary term for this type of marketing: surveillance advertising.
Digital marketers may also obtain data from third-party data brokers or second-party partnerships with other companies. Using these tools and others, digital marketers collect granular consumer data that they analyze to develop insights about consumers’ behavior more broadly.
The ways in which digital marketing providers specifically target ads are varied and evolve over time. Ultimately, the digital marketer may decide which group(s) the consumer belongs in and which financial services companies want to advertise to that group. Then they select the specific ad to display to that consumer and/or when to display the ad based on other factors (i.e., the amount a firm is willing to pay to display the ad).
Thus, many digital marketing providers are materially involved in developing content strategy by identifying or selecting prospective customers and/or selecting or placing content to affect consumer engagement, including purchasing or adopting behavior. These activities go well beyond the activities of traditional media sources, such as print newspapers or radio, that only passively provide airtime or physical space for advertisements.
The interpretive rule[ii] sets forth delineations for digital marketing being (1) a material service and (2) liable for UDAAP violations.
As the interpretive rule explains:
Digital marketers provide material services to financial firms.
A material service is one that is significant or important. Digital marketing providers are typically materially involved in the development of content strategy when they identify or select prospective customers or select or place content to encourage consumer engagement with advertising. Digital marketers engaged in this type of ad targeting and delivery are not merely providing ad space and time, and they do not qualify under the time or space exception.
The CFPB, states, and other consumer protection enforcers can sue digital marketers to stop violations of consumer financial protection law.
Service providers are liable for unfair, deceptive, or abusive acts or practices under the CFPA. When digital marketers act as service providers, they are liable for consumer protection law violations
A company is subject to the CFPA, including its prohibition on unfair, deceptive, or abusive acts or practices, if it offers or provides a financial product or service for use by consumers primarily for personal, family, or household purposes.[iii] And a “service provider” is also subject to the CFPA, including its UDAAP prohibition.[iv]
Chairman & Managing Director
[i] CFPB
Warns that Digital Marketing Providers Must Comply with Federal Consumer
Financial Protections, Press Release, Consumer Financial Protection Bureau,
August 10, 2022
[ii] Limited
Applicability of Consumer Financial Protection Act’s “Time or Space” Exception to
Digital Marketers, Interpretative Rule, August 10, 2022
[iii] See 12
U.S.C. 5481(5), (6), (15)(A); 5531; 5536.
[iv] See 12
U.S.C. 5481(26); 5531; 5536.
