Who's on first? The confusing state of federal fintech regulation

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WASHINGTON — Federal agencies have recently rolled out a series of efforts aimed at collaborating more on fintech regulation, but one key question remains: Who is taking the lead?

At least three agencies have made a claim on the fintech sector, with two doing so just in the past week. A fourth agency is potentially waiting in the wings.

The Office of the Comptroller of the Currency announced last week that it would create a federal special-purpose bank charter for fintechs, a move that could effectively make it the national fintech regulator. But just a week later, the Consumer Financial Protection Bureau announced it was forming a global network of regulators to help guide fintech firms, a network that did not yet include the OCC or other U.S. agencies.

The Commodity Futures Trading Commission, meanwhile, has already started its own international effort at fintech coordination, and the Federal Deposit Insurance Corp. has a potential claim to the space through its industrial loan company charter, which three fintechs have attempted to acquire.

That has left the industry wondering which agency, if any, is in charge of federal fintech policy.

"We have this incredibly fragmented system. There's something like eight to 13 regulatory agencies at the federal level depending on what type of oversight you're looking at," said Brian Knight,director of the program on financial regulation and senior research fellow at the Mercatus Center at George Mason University.

In theory at least, the Treasury Department's report last week on fintech was meant to combat this perception. It contained 80 recommendations, including that the OCC create a fintech charter. Reading between the lines, some observers said the report appeared to suggest that the OCC take the lead in developing policy. Even Treasury hinted as much.

“One of the higher priorities to achieve is that sense of agreement between the regulators,” a senior Treasury official told reporters when the report was released on July 31.

“About two-thirds" of the recommendations "can be done by regulators,” the official said. “Those regulators include most prominently the OCC.”

Regulators have long talked about collaborating more on overseeing fintechs, but efforts in recent years have been fragmented and sometimes prompted power struggles. Even the OCC's suggestion that it would pursue a charter prompted state regulators to file a lawsuit, which was eventually dismissed because it was premature. The battle will likely reignite now that the OCC is moving forward.

At the same time, the CFPB's plan, released Tuesday, seemed to be putting itself in the driver's seat among U.S. regulators covering fintech. It proposed a “Global Financial Innovation Network” with nearly a dozen foreign regulators including the United Kingdom, Singapore and Hong Kong. But no other U.S. regulator has yet officially agreed to join the group.

The bureau’s acting director, Mick Mulvaney, indicated in a statement Tuesday that U.S. regulators could come together but it remains unclear which agencies would join.

The network “demonstrates the Bureau’s commitment to promoting innovation by coordinating with state, federal and international regulators,” Mulvaney said in a press release. “We look forward to working closely with other regulatory authorities — whether in the United States or abroad — to facilitate innovation and promote regulatory best practices in consumer financial services.”

It isn't just bank regulators in the mix. The CFTC already signed its own arrangement with the UK's Financial Conduct Authority in February aimed at collaborating with regulators to oversee and foster innovation. The FCA is part of the CFPB's new global network, but the CFTC so far is not, instead saying it would be a part of discussions.

“The CFTC is engaging closely with leading domestic and international regulators, including through our FCA FinTech Cooperation Arrangement, on best practices and regulatory tools for fostering market-enhancing innovation,” said Daniel Gorfine, the CFTC’s director of LabCFTC and chief innovation officer. “At this time, we will remain a participant in GFIN-organized discussions, as well as other collaborative efforts, and look forward to helping develop modern approaches for regulatory engagement with innovative technologies.”

Though efforts to create uniformity are still fragmented, many agree that it’s better than agencies working in silos — or not looking at fintech at all — as they have in the past.

It’s also unlikely regulators could achieve uniform regulation with one agency as the lead unless they create a commission of regulators, some observers said.

“I’m supportive of having a council that would have rotating chairs so it’s not owned by any one agency,” said Jo Ann Barefoot, CEO of Barefoot Innovation Group and a co-founder of Hummingbird Regtech. “It’s critical to have interagency activity. Everything we’re doing should aim to bring the regulators more and more together.”

The FDIC, meanwhile, remains a wild card in the mix. Three fintechs — Square, SoFi and Nelnet — have applied to form an ILC, which does not require the group to form a bank holding company. The Bank Holding Company Act bans the mixing of banking and commerce which means under the ILC route, even Amazon or Google could theoretically form a bank.

Both Square and SoFi have since withdrew their applications, with Square vowing to resubmit at a later date. The Independent Community Bankers of America is pushing the FDIC to temporarily ban any new ILCs in the hopes Congress will look at the issue. New FDIC Chairman Jelena McWilliams has not signaled how she views the issue, but recently said she would make faster decisions on bank charter applications.

“The agency has a duty to the public to actually proceed," she said in June. "Now, that doesn’t mean that we will approve every application. That doesn’t mean that we will deny every application,” McWilliams said. “But we have to move swiftly; we can’t just sit on those applications.”

Part of the confusion is due to the existing fragmented financial framework in the U.S, where regulators have different missions. Some focus on safety and soundness of the banking system while others look at consumer or investor protections.

Though the Treasury gave a nod to the OCC, the senior Treasury official acknowledged that other fintech firms will “fall in the purview of other regulators.”

“We will work with each one of them on the recommendations and try to bring them all to fruition,” the official said.

Specifically, the Treasury is prompting regulators to create a more uniform so-called “sandbox” approach where fintech firms can test a product or service under regulatory oversight.

“We need to fasten our seat belts for a real roller coaster ride in the next few years as we develop this,” said Barefoot, a former OCC senior official. “Creating regulatory harmony over fintech is exponential instead of linear. That’s at the heart of the challenge in getting any particular regulation right.”

Some state and federal bank regulators, such as the CFPB, have embraced this approach while others are staunchly against it because of perceptions that it would provide a legal safe harbor to startups testing products on consumers. Thomas Curry, the previous comptroller of the currency who initiated the fintech charter concept, said any sandbox should clarify upfront what happens if consumers are harmed in the product testing phase and how they will be remediated.

“It’s not good for the fintech industry if it gets carte blanche in this process,” said Curry, now a partner in the corporate and transactions department and a co-leader of the banking and financial services group at Nutter McClennen & Fish LLP.

“Too much attention has been on absolving participants from potential liability,” he added. “There needs to be more focus on how to bring in regulatory perspectives on the product testing stage.”

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Fintech regulations Regtech Licenses and charters Fintech Mick Mulvaney Thomas Curry OCC CFPB CFTC RegTech Conference