Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, is weighing in on the future of regulation for fintech companies as well as traditional banks, which are each seeking something different from federal reformers to propel their growth.

As the Office of the Comptroller of the Currency hustles to create a nationwide regulatory framework for financial technology firms, the other federal banking agencies have largely kept their heads down. But Harker argued Monday during a speech in San Diego that the fintech sector should embrace more oversight now, rather than waiting until after the next crisis.

"It’s unlikely that increased oversight will be welcomed with open arms, but I should say now that it’s actually in the interest of fintech firms," he said, according to a copy of the prepared remarks.

In the process he offered a full-throated defense of financial regulation. Clashing with the rhetoric of President Trump and his administration, Harker — who took the reins at the Philadelphia Fed in July 2015 — argued that regulation is good not only for consumers, but also for the innovative firms being regulated.

Patrick Harker, president and chief executive officer of the Federal Reserve Bank of Philadelphia.
Prudent planning: "We need to make sure that the regulatory frameworks are in place … if and when these new entrants into financial services become large," Philadelphia Fed President Patrick Harker says. Bloomberg News

“Regulation being the great bogeyman of the industry, I’d like to note that regulation is necessary for a functioning system,” Harker said.

He acknowledged that fintech firms of various stripes are already required to comply with a host of federal and state regulations. At the same time, he suggested that the sector needs closer monitoring than it gets today.

“What fintech outfits don’t want is regulation that comes in after a crisis,” Harker said. “That type of regulation almost always fights the last war, and that could mean tighter strictures and less room for innovation after the crash at the end of a credit cycle.”

During an interview prior to the speech, Harker — who was joined by William Spaniel, head of the Philadelphia Fed’s supervision, regulation and credit department — expanded on these themes. He warned about the dangers of slashing financial sector regulations to promote economic growth at traditional banks without considering the consequences first.

“Any change that one makes typically has unintended consequences,” said Harker, 58, a former dean of the University of Pennsylvania’s Wharton School as well as a former president of the University of Delaware.

“That’s just the nature of change,” he told American Banker in response to a question about the Trump administration’s deregulatory agenda. “So I think it is important for us to take the time collectively to think through all the implications of the changes that are being proposed.”

The following is a transcript of the rest of the interview with Harker and Spaniel, edited for length and clarity.

“Fintech” is a pretty broad term. As it’s generally applied, it covers areas like online lending, robo-advisers and digital currencies. Should we be looking at each of those areas separately when it comes to regulation?

PATRICK HARKER: I think one regulatory regime for something called “fintech” — when it’s so hard to define, as you said — doesn’t make a lot of sense.

Some in the fintech industry have been calling for the creation of a so-called regulatory sandbox, where innovators would be free from enforcement actions as long as they stay within certain parameters. What’s your view on that idea?

HARKER: First, it’s not just the new entrants … that are asking for this. … There are some existing financial institutions who also want to innovate and to experiment in this space. And I think that is a valid concern and request. … Of course, as those systems scale up, we need to make sure that the regulatory frameworks are in place … ultimately to protect the consumer and to protect the safety and soundness of the system, if and when these new entrants into financial services become large.

The OCC is going ahead with creating a special charter for fintech firms. It’s drawn some opposition from a number of quarters, including a lot of the state regulators. Are you a proponent of the OCC’s fintech charter?

WILLIAM SPANIEL: I think the OCC charter is a good direction, to give people some of the confidence to be able to do this, and to do this in a way that allows innovation. But I don’t think it prevents states from doing similar things in terms of innovation, or chartering, or allowing banks to do some innovation in this space.

If a particular state wanted to provide certain consumer protection regulations that go beyond those imposed by the OCC, do you think that would be OK?

SPANIEL: I think, in today’s environment, that occurs in some cases, even in the banking sector. And we can deal with those differences. I think we tend to default to what the more stringent rule is for consumer protection. … The states have consumer protection rules, we have national consumer protection rules, and we’re cognizant of both, I think, as we try to supervise institutions.

The Federal Reserve has been, I would say, relatively quiet on fintech regulation when compared with the OCC. Do you agree with that assessment? And if so, why do you think that’s been the case?

HARKER: I wouldn’t say that we’ve been completely quiet. I mean, we’ve convened a lot of people around this idea. We’ve done several deep dives and published quite a bit around what’s happening in this space. That said, when it comes to actual regulatory issues, it is true that the OCC has taken the lead in this, and I think that’s appropriate.

SPANIEL: I think the reason you see the OCC in the lead there is because they are a chartering authority for financial institutions, whereas the Federal Reserve is not.

Should the Community Reinvestment Act apply to online lenders that don’t have a traditional geographic footprint like banks?

HARKER: if you think about CRA as it was initially conceived, it was a geographically focused, branch-focused regulation. And it’s not just a fintech issue. … I don’t think branches are going away anytime soon. But as banks have changed the way they conceive of the branch and what it does, I do think that requires us to have a rethink on how banks fulfill their CRA requirements. In my view, and I’ll only speak for myself, not the Federal Reserve System, to receive a charter means there’s certain benefits you get from a charter, and there are also certain obligations. And I think this is one of the obligations.

The regulatory structure we have was clearly built at a time when a lot of the innovations in fintech had not happened. And so we have a situation now where a lot of the regulations that apply to these companies are administered and enforced by a variety of agencies. Do you think there’s a need for a reconsideration of the regulatory structure?

HARKER: Fintech is just the current chapter in a long evolution of financial services. ... I think we can’t lose sight of the fact that the regulatory framework has always evolved as the industry has evolved, and that will continue. So we have to be careful to throw the proverbial baby out with the bathwater and say we’re just going to start all over because this is a whole new world. I don’t accept the basic premise that it’s a whole new world. I think it’s just part of this evolutionary process.

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