Are global regulators gunning for big tech?

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WASHINGTON — Remarks last week by a senior Federal Reserve official on the expansion of big tech firms into the financial industry have spurred new questions about the future of regulation for fintech firms.

Federal Reserve Vice Chair for Supervision Randal Quarles, speaking as chair of the Financial Stability Board in Germany Thursday, cautioned that companies like Amazon, Facebook and Apple are adding both potential for greater efficiency and newfound risks as they step further into the financial system.

He said the FSB would begin giving regulatory responses to big tech with “discipline and analytical vigor" — leaving some wondering how high regulators could set the bar for fintech firms going forward.

“Over the last decade, the world has witnessed an explosion of large technology firms that are weaving themselves into our daily lives: for example, Facebook, Amazon, Apple, Tencent and Baidu,” Quarles said at an event jointly hosted by the European Central Bank in Frankfurt. “Technological innovation offers the promise of a substantially more efficient financial system. But new systems, processes and types of businesses will bring with them novel fragilities.”

In response, Quarles said, the Financial Stability Board has “started to examine in greater detail” the potential effects of big tech firms entering the banking system and how technologies are decentralizing financial transaction by no longer requiring an intermediary.

These two effects “raise a number of issues, some of which may touch on financial stability,” he said. “We hope to offer some answers to these questions in the coming years. ... We will address the questions with discipline and analytical rigor in a way that incorporates the views of the public and key stakeholders and that results in answers that are practical and intelligible.”

For some in the banking industry, the remarks served as a warning to big tech firms, particularly as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. weigh bank charters for fintech firms in the U.S.

Karen Shaw Petrou, a managing partner at Federal Financial Analytics, said the concerns raised by Quarles, particularly about large tech firms entering the payments system, must be addressed by the stability board on a global level and by the Fed in the U.S.

“The big tech platform companies are not only pressuring to get in the Fed payments system, but several are already providing core infrastructure more globally ... where the FSB fears a natural oligopoly,” she said. “It is very significant payments system risk.”

The Independent Community Bankers of America said that it “agrees with Chairman Quarles that while technological innovation promises a more efficient financial system, monolithic tech firms and the decentralization of financial transactions pose risks to financial stability,” ICBA President and CEO Rebeca Romero Rainey said in a statement released Thursday after Quarles' remarks.

The ICBA further said Quarles' speech gives cause for the FDIC to place another moratorium on allowing firms to become industrial loan companies, or ILCs. Fintech firms including Square have pending ILC applications with the FDIC.

But the agency has not approved an ILC in more than a decade, partly because it could allow commerce to mix with banking, which is particularly concerning for the ICBA as e-commerce giants like Amazon are entering the financial business. The ILC charter also exempts the firm from bank holding company requirements, which bankers argue puts traditional banks at a disadvantage.

“The ILC loophole allows commercial interests to own full-service banks while avoiding key regulations and consolidated supervision by the Federal Reserve—threatening the financial system, creating an uneven regulatory playing field, and violating the longstanding U.S. policy of separating banking and commerce,” Rainey said in her statement. “In this era of big data, tech conglomerates, and artificial intelligence, we should stop and think before giving massive tech companies further reach into the economic lives of Americans."

Quarles did not specifically address ILCs in his speech, but sources say the Fed has long been concerned about the holding company exemption. Quarles' speech also mirrored a report the FSB released in February that raised concerns about the power big tech firms could gain in the financial system.

These concerns are similar to what "the ICBA is raising in that big tech firms have the ability to use social media and other technology to help tailor offerings to individuals that would give big tech firms strong financial positions to be very effective competitors," said Thomas Curry, a partner at Nutter McClennen & Fish LLP and former comptroller of the currency.

Still, other observers downplayed the Fed official's remarks, arguing that they were less about stopping fintechs from becoming banks or ILCs and more about taking a reasonable approach to regulating fintechs within the financial system.

“I thought it was quite positive on fintechs,” said Jo Ann Barefoot, co-founder of Hummingbird Regtech and a former deputy comptroller of the currency. Quarles gave “a good statement that the Fed does recognize the upside opportunities for financial innovation and will be careful not to undermine that as the FSB addresses its necessary task.”

In his speech, Quarles underscored that global regulators "are not trying to oppose innovation.”

“Innovation, including fintech, offers the world many potential benefits,” he said. “As the group charged with ensuring financial stability, however, we have to work to ensure that we can reap the benefits offered by these new technologies without harming financial stability.”

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