WASHINGTON — The Office of the Comptroller of the Currency unveiled a white paper Thursday detailing how it plans to supervise financial innovation at national banks and beyond, taking a broad albeit tentative approach to the issue.
The 11-page paper describes eight principles the agency will follow in handling regulation of financial technology, ranging from a commitment to better communicate with financial institutions to a pledge to work with the Consumer Financial Protection Bureau and other regulators to develop a consistent supervisory approach to fintech products.
"Essentially, we are working on a framework to help us understand and evaluate innovation," said Comptroller Thomas Curry in prepared remarks for a speech to be delivered Thursday at Harvard University. Innovation "is not risk free. But it can be managed, and we want to foster an internal culture that is receptive to new technology and new ways of doing business."
The agency is still considering whether it should open a dedicated office that would monitor the fintech sector, an idea Curry first mentioned in August. He said Thursday that "we haven't made that decision yet."
The agency might also issue new guidance on product development, third-party risk management and new products targeting the underbanked; streamline its licensing procedures; and appoint experts on "responsible innovation." The OCC already has internal working groups on payment systems policy and marketplace lending.
"Not every innovation is appropriate for a regulated financial institution, and not every innovation that is appropriate for a regulated institution is appropriate for all regulated institutions," Curry said. "But avoiding new approaches completely is equally dangerous."
Curry said that "at a minimum," the agency must be sure it has "the capacity to identify and understand new trends and technology, as well as the emerging needs of the consumers of financial products."
"We want to be sure we're in a position to quickly evaluate products that require regulatory approval and identify the risks that go with them — as well as the safeguards that will be necessary to manage those risks," he said. "And we want to be a resource for banks and thrifts looking for guidance on our supervisory expectations as they consider new and innovative products."
The paper comes at a time when the industry is struggling with the challenges of financial innovation — and is clearly worried about the future. Citigroup released a paper Wednesday that predicted a 30% reduction in bank employees over the next 10 years due to financial innovation.
"Fintech is changing the world of finance," the Citi paper says. "In the U.S. and Europe, we are at a tipping point, especially in consumer banking."
The OCC's white paper appears somewhat more optimistic. It offers vague encouragements for the financial innovation space. It cited products that could improve financial inclusion, including online and mobile banking, small dollar, unsecured loans and social responsibility funds. It also alluded to the strategy of piloting products on a small scale that can give "banks a safe harbor from consumer laws and regulations during the testing phase."
But the OCC also warned of the risks associated with innovation, including the disappearance of brick-and-mortar branches in poor neighborhoods and cybersecurity concerns. Cyber risk "is one of the most significant risks facing the financial industry as it implements new technologies," the OCC said.
The agency advised banks to remain consistent even as they venture into new lines of business. In its definition of "responsible innovation," the agency stressed that investment in new products must be done "in a manner that is consistent with sound risk management and is aligned with the bank's overall business strategy."
In his speech, Curry said that meant a bank must understand a product and the risk it carries — and have the capacity to manage that risk.
Following are the OCC's eight principles:
- Support responsible innovation.
- Foster an internal culture receptive to responsible innovation.
- Leverage agency experience and expertise.
- Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers.
- Further safe and sound operations through effective risk management.
- Encourage banks of all sizes to integrate responsible innovation into their strategic planning.
- Promote ongoing dialogue through formal outreach.
- Collaborate with other regulators.