The continuing rise of innovative technologies entering the world of finance has posed regulatory concern and difficulties for domestic state and federal legislators, as well as regulatory agencies. Both legislators and regulators have been accused of being behind the curve with respect to understanding unfolding financial innovation and more importantly how to appropriately regulate it.
Front is center is a key question – should fintech firms be subject to the same or similar regulations as banks? Driving the issue to the front burner is the dizzying amount of new technology-based companies emerging during the last few decades, with some entrants choosing to partner with banks and others choosing a path to act like banks as they execute their respective business models.
From a legislative perspective, some legislators embrace the notion fintech’s can continue to lead the charge in maintaining the U.S global status as tech innovator, and thus are reticent to impose regulatory hurdles that may potentially inhibit the advancement of U.S. technological interests. Other legislators are hopeful that fintech may additionally create economic opportunities for underserved segments of society.
Flipping the coin over from a legislative perspective, there is a large contingent of legislators that argue that fintech self-policing has failed miserably, and many fintech firms have trampled all over individual privacy rights. Today legislators are quite concerned about consumer protection issues, not to mention safety and soundness related issues as more and more fintech’s are acting like banks, but do not operate with similar regulatory oversight scrutiny.
From a regulatory standpoint it seems the very agencies that oversee banks are not all on the same page as it relates to fintech’s. At the state level there appear to be a few states aggressively trying to entertain doling out state banking charters for fintech companies while other states are opposed to granting such charters. At the federal level, the same can be said with the Comptroller of the Currency (“OCC”) assuming the mantel, at least for now, of being a fintech friendly regulator that has attempted to promote special purpose national bank charters geared to supporting fintech innovation.
The advent of the special charter has created a mild firestorm between state regulators and federal regulators, as evidenced by the Conference of State Bank Supervisors (CSBS) bringing into question the OCC’s authority and ability issue limited scope fintech federal bank charters. One current battle involves Figure Technologies who is seeking a national bank charter to pursue its business model. The basis of the CSBS argument can be found in its’ President and CEO’s recent statement, “Figure is essentially the first applicant for the OCC’s Fintech charter. Its plan to become a national bank without obtaining deposit insurance is an illegitimate attempt to evade the controversy surrounding the fintech charter and the federal court decision that invalidated it. If the OCC is allowed to create a special purpose nonbank charter, it would redefine our entire banking system, create new systemic risks, and set a dangerous precedent that any federal agency can act beyond its legal limits. We believe that the court will share our concern and rule against the OCC’s unlawful attempts to expand its authority.”
The Figure Technologies application with the OCC additionally raised concerns among bankers. In December 2020, several trade institutions including the American Bankers Association, directed a letter to the OCC essentially stating that the review of the application for a charter by Figure should be postponed. The letter also entailed questions regarding the grounds of Figure to accept uninsured deposits.
Other recent controversial actions from the banking industry perspective is issuance of a recent interpretive letter that essentially expanded the scope of entities eligible to apply for a national bank trust charter, eliminating a longstanding requirement that applicants of a national bank trust charter engage in fiduciary activities. Soon after the interpretive letter came out the OCC conditionally approved charters for Anchorage Digital Bank and Protego Trust Bank. Without this new interpretive letter neither of these entities would have been eligible for the banking charter.
Bank trade associations such as the ABA and ICBA are crying foul as the interpretive letter seems to bypass the conventional rule making process including a public notice and comment period. In other words, there was not chance to weigh in in on potential sweeping changes affecting the financial landscape.
Despite the firestorm the recent departure of fintech friendly acting OCC chair Brian Brooks, may have slowed the momentum of issuing new limited scope national charters. This is may be especially true with the appointment of Janet Yellen as Treasury Secretary creating a situation where a new yet to be appointed Comptroller may not enjoy as much autonomy.
In the meantime, legislators and regulators alike will be challenged to grapple with an ever-shifting landscape of automation changing finance as we know it today.