California governor to fintechs: Forget Utah. Be an ILC here.

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SAN FRANCISCO — New details are emerging regarding Gov. Gavin Newsom’s far-reaching plan to overhaul financial regulation in California, including one provision that could help the state to retain some of Silicon Valley’s many fintech companies.

The first-term governor wants to expand the powers of the existing state financial regulator in ways that mirror congressional Democrats’ original vision for the Consumer Financial Protection Bureau. His proposal also represents an effort to enable fintech firms to engage in more dialogue with state officials.

Those twin goals have gotten substantial attention since the proposal was unveiled last month. They are reflected in the agency’s proposed new name — the California Department of Financial Protection and Innovation.

At an online lending conference Wednesday in San Francisco, one state official provided a fuller view of what the Newsom administration has in mind when it talks about supporting innovation, suggesting that proposed changes to California’s regulatory scheme could prevent innovative companies from moving to other states.

A proposal by Gov. Gavin Newsom would create an agency with a twin mission of protecting consumers and fostering innovation.
A proposal by Gov. Gavin Newsom would create an agency with a twin mission of protecting consumers and fostering innovation.

“I don’t think anyone in this administration or at the department is interested in seeing those businesses go away,” said Edgar Gill, senior deputy commissioner at the California Department of Business Oversight, which would be expanded and revamped under the governor’s plan.

“We think that there should be a viable way for us to find a working platform for innovative businesses to remain here in California.”

Companies that have moved their headquarters out of the state in recent years include Toyota USA and Nestle USA. High housing costs, taxes and regulations are frequently cited as reasons for such moves. Those issues are particularly acute in San Francisco, where a one-year-old corporate tax to fund homeless services hits financial services companies disproportionately.

Gill did not specifically address legislative language that was released by the Newsom administration last weekend, but at least one provision in that proposal appears to relate to the goal of retaining California-based companies.

As fintech companies have weighed various regulatory options in recent years, some of them have eyed industrial bank charters. Social Finance, the San Francisco-based online lender known as SoFi, sought to open a Utah-based industrial loan company in 2017 but subsequently withdrew its application. Square, which is also based in San Francisco, has also applied to operate a Utah-based ILC.

The Independent Community Bankers of America has opposed the fintechs’ applications, arguing that they represent efforts to avoid scrutiny by the Federal Reserve Board, and has called for a moratorium on providing federal deposit insurance to ILCs.

Manuel Alvarez, commissioner of the Department of Business Oversight, told Bloomberg Law in a recent interview that an overhaul of the state’s industrial bank licensing laws could encourage homegrown companies to stay in California.

To be sure, the fintech industry is not getting everything it wants from the Newsom administration.

Alvarez told Bloomberg Law that California will not be operating a so-called sandbox program, in which startups get carve-outs from certain regulatory requirements so that they can test innovative products with consumers. Since 2018, Arizona, Wyoming and Utah have all created fintech sandboxes.

Sandboxes are generally unpopular with consumer advocates, who take issue with the premise that regulation should be sidelined in order to nurture innovation.

“Gunpowder was innovative. Chemical weapons were innovative at a particular period of time,” said Christopher Peterson, director of financial services at the Consumer Federation of America, in remarks at the conference in San Francisco. “The question is whether or not, from my perspective, whether or not that innovation helps people or hurts people.”

Under Newsom’s proposal, the Department of Financial Protection and Oversight would add 90 employees over three years, including 18 examiners and 16 enforcement staffers.

The state agency would have the ability to enforcement bring actions against financial service providers that engage in unfair, deceptive and abusive acts and practices — similar to the CFPB’s authority under the Dodd-Frank Act.

The proposal would require more types of companies, including debt collectors, to register with state financial regulators. In all, state officials expect 9,000 new registrants. Over time, they plan to use the additional registration fees to pay for the $19.3 million annual cost of the proposal.

The plan is part of Newsom’s annual budget proposal. The Legislature must pass a budget bill by June 15.

California Republicans will not have the ability to stop Newsom’s proposal on their own because Democrats have supermajorities in both the state Assembly and the state Senate.

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