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Governor Gavin Newsom’s veto of a law intended to strengthen protections for elders in California represents a setback for consumer protection in the US.
The bill, SB 278, which intends to make amendments to the existing Elder Abuse and Dependent Adult Civil Protection Act, passed both the state's Assembly and Senate with bipartisan support in late August.
However, Newsom vetoed the bill in its current state on September 28.
The proposed legislation sparked a liability debate between consumer advocates and the financial industry when first mooted, although subsequently made its way through the legislative system.
On vetoing the bill, Newsom urged the legislature to “continue refining this concept to ensure it is both implementable and strikes a better balance between consumer protection and individual rights”.
The governor identified several concerns, writing: “The mandatory three-day hold on transactions suspected of abuse could lead to unintended consequences, such as delaying legitimate transactions and restricting access to funds, thereby undermining the financial independence of affected account holders.”
“Furthermore, the proposed enforcement provisions need further review to ensure they are legally sound and minimize the risk of costly litigation — a burden that would ultimately fall on taxpayers and diminish the overall effectiveness of the bill.”
The next steps are unclear, with Democratic state Senator Bill Dodd of Napa, who sponsored the bill, set to retire at the end of 2024.
In addition, the re-election of Donald Trump as President is set to impact consumer protection in the US.
As covered by Vixio, the incoming administration is likely to make changes to the Consumer Protection Financial Bureau (CFPB) that will affect how the payments sector is governed at the state and federal levels in the country.
Legislative roadblocks
When Senator Dodd first proposed the amendment in March, he argued that the existing law provides insufficient support for elders in the state.
A key example was that of Alice Lin, an 81-year-old California resident who lost more than $700,000 to a cryptocurrency scam, arguably because the existing rules covering wire transfers failed to protect her.
Whereas credit card payments in the US have insurance mechanisms built into their regulation, wire transfers are not afforded the same protections, creating potential for scams and fraud that Dodd argued are more likely to affect elders.
In California, an elder is anyone over the age of 65, as stated in California Welfare and Institutions Code Section 15610.27.
The proposal mandated financial institutions to establish an emergency financial contact programme for account holders over the age of 65.
If an institution had reason to expect that a transaction could constitute financial abuse of some form, it would legally be bound to notify the joint account holder or designated emergency contact and delay the transaction by at least three business days.
Increased burden for banks
Jason Lane, director of government relations at the California Bankers Association (CBA), was among those who objected to the initial wording and proposals of the bill, suggesting it would remove financial liberties.
However, Lane subsequently dropped his opposition following a round of amendments by the Judiciary Committee that reduced, but did not eliminate, certain liability provisions that the CBA and others strongly opposed.
“If you inject too much liability into getting it [spotting scam transactions] wrong or having institutions civilly liable for failing to identify a fraud, then you probably risk creating a brand new problem for the unbanked population of Californians,” he said.
“This could lead to a new population of seniors that no longer have access to their funds like they used to, because the liability is so great.”
The provisions of the bill would hold institutions civilly liable for failing to suspect that fraud is occurring.
“Banks are now leaving the decision about whether or not to be sued to a 20-something year old teller who might be working their way through college to make a decision, on behalf of a senior,” added Lane.
“Most institutions are not going to do this, they are going to just code their systems to flag transactions, set them aside, hold them for three days, and then allow those transactions to go through."
Dodd initially claimed that the delays would be used only for those elders who most need protection, rather than be applied across the entire generation of depositors.
The liability provisions were reduced enough to allow the CBA to remove its official opposition to the bill, but the organisation still voiced concerns.
“In many cases, banks will just default to holding transactions, which is no good for anyone,” added Lane, suggesting that the bill would undermine the capabilities of elders.
Many California residents aged 65 and older are more than capable of making financial decisions without the involvement of their bank or a third party, he added.
The fraud arms race
One reason increased protection against scams may be necessary is that payment fraud has grown in sophistication and complexity in recent years, becoming much harder to monitor, predict and prevent.
Yinglian Xie, CEO and co-founder of DataVisor, said that scammers are using new technologies and fraud patterns are evolving much faster than ever before.
“We all know already that deep fake and gen AI technology is available and can process immediately,” she said.
“Many of us already understand that fraud is very fast, but we still underestimate how fast that can be. I talked to banks and credit unions that had launched a real time payment service for one day and had to close it immediately.
“The moment they launched it, fraudsters discovered it and started hitting them hard and discovering vulnerabilities everywhere. We're working in hours, not months and weeks,” she added.
This rapid evolution makes it difficult for financial services to keep up while maintaining a commitment to customer service and protection.
The national picture
The debate on fraud protections underway in California could spread across the US, given that the state is comfortably the largest economy in the country and is often a financial trend setter.
There has been an emphasis on tackling payment scams in recent years, and elder financial abuse has been central to that discussion.
However, the bill’s faltering in the California system is likely to affect the possibility of preventative action on the federal level.
Caleb Logan, an attorney at Elder Law & Advocacy and one of the proponents of the bill when it was debated in the California court, told Vixio that he felt the people of the state would be receptive to the idea of strengthening protections for older adults.
However, he was surprised that even in such a politically progressive state there were politicians prepared to slow it down to the extent that they did.
“If this is what happens in California, then why would a national bill do any better?” he asked.
In place of a federal law, Logan suggested that the existing Electronic Fund Transfer Act could be expanded to include wire transfers and not just deposit accounts.
Under existing rules, fraudulent activity of this nature is not considered to be unauthorised, and is therefore not covered.
Changing this would, he said, be a huge limitation for wire transfer scams such as the one that impacted Alice Lin.
The next steps
Chris Micheli, a principal with the California based governmental relations firm of Snodgrass & Micheli, who also testified on the judicial committee discussing the case, told Vixio that the fundamentals of this debate are not clear cut.
He said the proposed rules might not be effective at preventing fraud, and would create more red tape for banks, which should not have to act as a gatekeeper to anyone’s finances.
He also argued that large, nationally chartered banks would likely have been protected by the National Bank Act, and therefore likely exempt, even in California, limiting the law’s impact even had it not been rejected.
However, Micheli welcomed Newsom’s call to improve the proposals, suggesting that there is hope for elder protection measures that do not undermine financial freedoms.
“Is there actually a way to thread the needle, to do something right? That is the big unknown,” he said.
It remains to be seen whether other states will pursue similar legislation, and if the federal government will follow suit.
Under a Trump presidency, regulatory action of this nature seems unlikely, with the administration more likely to be “sympathetic” to banks across the country, Micheli said.
An alternative might be a collaborative approach between banks, social media companies, fraud prevention organisations and elder protection services, and such a coalition could provide holistic strategies where federal or state regulatory action fails.
Efforts to reintroduce elder protection legislation may continue in California under new leadership, but will likely require a balance of interests and cross-industry collaboration.
