OCC Grants New Charter to Fintech Firms — with Strings Attached

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WASHINGTON – The Office of the Comptroller of the Currency will start granting limited-purpose bank charters to fintech companies, but it intends to maintain high standards for new entrants.

"The OCC will move forward with chartering financial technology companies that offer bank products and services and meet our high standards and chartering requirements," said Comptroller of the Currency Thomas Curry in a speech Friday at the Georgetown University Law Center announcing the decision.

The move is a significant victory for fintech firms that had sought such a charter because they do not want to register in multiple states and face different laws and restrictions in each. A federal charter for fintech firms would largely allow them to comply with a single set of national standards – and gives them a single agency to apply to when seeking a license.

It is also likely to set off a battle with state regulators, who have warned that a federal charter is both dangerous and unnecessary, and some within the banking industry, who fear fintech firms will have now have the advantages of a bank without their obligations.

Curry was quick to try and head off such criticism, arguing that the agency would subject fintech firms to appropriate standards that do not give them a leg up on the competition.

"It will be much better for the health of the federal banking system and everyone who relies on these institutions, if these companies enter the system through a clearly marked front gate, rather than in some back door, where risks may not be as thoughtfully assessed and managed," he said.

Fintech companies that obtain a limited-purpose bank charter will still have to comply with several regulatory requirements, including the Bank Secrecy Act and other anti-money-laundering provisions, as well as relevant consumer protection laws.

They will be granted the same preemption over state laws that national banks possess.

"The reality today is that the 4,000 fintech companies out there are already competing with national and state banks, without regard to any of the national bank responsibilities and under a patchwork of supervision," Curry said. "In some ways, [creating a charter] levels the playing field because statutes that by their terms apply to national banks would apply to all special purpose national banks, even uninsured ones."

Though details for the new charter are not yet finalized, the OCC established in a paper released Friday that it will use its authority to grant special-purpose charters – which currently applies to companies like trust banks – to allow fintech companies into the banking system.

In order to apply for a special-purpose charter, a company must engage in fiduciary activities, or either one of the three core banking functions: lending money, paying checks or receiving deposits.

As the OCC hinted at in a proposal issued in September that laid out its authority for taking over a failing institution that does not accept deposits, the agency expects fintech applicants to apply as nondepository institutions, which would mean they could avoid certain requirements that come with being supervised and insured by the Federal Deposit Insurance Corp. Still, the OCC said it could make some of those requirements as part of the chartering process, including mandating that fintech firms comply with the Community Reinvestment Act. 

However, Curry said that companies interested in applying would have to make up for the looser regulatory regime they face during the application process.

For instance, companies must explain how it plans to address financial inclusion as part of a detailed three-year business plan that includes economic forecasting and risk assessments.

The OCC also suggested it would enforce higher capital requirements on fintech firms than on banks, because of "off balance sheet" business activities they might be involved in.

"The OCC would consider adapting capital requirements applicable to a fintech applicant for a special purpose national bank charter as necessary to adequately reflect its risks and to the extent consistent with applicable law," the OCC said in its paper.

Fintech companies will also be required – like banks – to develop a formal plan for failure and to have a hands-on board of directors.

Curry called for the development of "a formal agency policy" that will determine whether the OCC grants a fintech's application for a charter or not. The OCC asked for public comments – due Jan. 15 – to determine exactly how the charter should be granted.

Curry also pushed back against critics worried that offering a federal charter to fintech companies could give them an unfair advantage over banks by allowing them to benefit from preemption of state standards without facing the same supervision as banks.

"Fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters," he said. "Fintechs, while not without some risks, also can potentially deliver these products and services in a safer and more efficient manner."

As national banks, special-purpose or not, they must still comply with a number of state laws, ranging from anti-discrimination to fair lending and debt collection laws, the OCC said.

"The OCC may ask an applicant that plans to extend credit to provide the terms on which it plans to lend, including a description of the protections it plans to provide to individuals and small business borrowers," the white paper said.

Since last year, the OCC has made efforts to position itself as a leading player in fintech among federal regulators. In March, the agency issued a white paper on so-called responsible innovation, calling for public comment on how it could better tackle the rising industry. And in October, the OCC announced it would create an Office of Innovation, complete with a San Francisco enclave, to coordinate outreach to fintech companies and internal research on the topic.

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