Congress can work around court’s nixing of OCC fintech charter
The federal and state framework for authorizing or licensing and regulating fintechs is not meeting the needs of consumers and the industry.
How long can regulators and governments wait to address the rapid changes wrought by technological innovation? Recent legal developments indicate that we are going to have to wait a lot longer for a sound, national framework to emerge.
Although the Office of the Comptroller of the Currency was an early actor and thought leader, the United States has been all too slow to adapt its regulatory structure and supervisory approach.
In 2014, the OCC was the first U.S. financial regulator to programmatically and transparently examine the strategic and regulatory implications of financial technological innovation. The agency’s white papers and public forums first focused on internal barriers to fostering responsible innovation.
This led to the creation of the OCC Office of Innovation as well as a proposal to provide an organizational and regulatory structure for fintechs to operate nationwide with one rulebook and one regulator.
The U.S. government’s overall response has been slower. A blueprint emerged last July from the Treasury Department when it released a study and recommendations on innovation and fintechs.
It was an important first step despite some initial criticism. The OCC also simultaneously announced that it would accept applications for its special-purpose fintech national bank charter. This was an initiative I initially launched in 2016 and was pursued by my successor, Comptroller Joseph Otting.
Unfortunately, the OCC fintech charter currently is stymied by litigation brought by the New York State Department of Financial Services and the Conference of State Bank Supervisors challenging the OCC’s authority to charter special-purpose banks.
In my view, this is an unfortunate state of affairs. The U.S. District Court Judge Victor Marrero’s Oct. 21 final order in favor of the NYDFS erred on the law. I fear this ruling will prove to be a Pyrrhic victory that impedes the quest to fashion a fair, effective and sound national regulatory framework for fintechs.
For now, and into the foreseeable future, fintechs will have to cope with a multistate, multiregulator system. Such a system is often inconsistent with minimal prudential and consumer protection standards and oversight under a variety of nonbank licensing schemes, some of which date back to the 19th century.
The current environment does not serve consumers well and creates an unlevel playing field for highly regulated banks that offer the same products or services.
We cannot wait one, two or more years for the federal courts to decide whether the OCC fintech charter is a means to offer a national option for fintechs, while other countries develop competing and streamlined regulatory frameworks that are conducive to innovation.
The worst outcome would be the emergence by default of inadequate or ineffective consumer protection, financial inclusion, money laundering, privacy and data protection standards for fintechs.
We need to move toward a new U.S. regulatory paradigm for fintechs that adapts the best features of America’s dual banking system by fostering competition in excellence, instead of a race to the bottom between state and federal financial regulators.
In some sense, we are slowly moving toward such a dual fintech system.
In the interim, Congress needs to start considering a bipartisan legislative solution that builds on the home-and-host state framework established under the 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act. The law allocated prudential, consumer protection and Community Reinvestment Act responsibilities between the states, which led to a truly nationwide banking system.
Importantly, the Riegle-Neal Act also preserved for national banks the option to operate on an interstate basis, under a single federal regulator, and a clear rulebook. Fintechs and consumers of their products and services deserve the same.
The question is whether we have the luxury of time for the states to work out these issues through multistate regulation and legislation.
State efforts to harmonize and standardize licensing, examination, supervision and financial reporting requirements among its member state supervisors are laudable.
Unfortunately, the lack of consistency in statutory definitions and requirements — and the manner in which they are interpreted and applied by each state — presents thornier issues that are potentially beyond the authority of the state bank supervisors.
Needed state level changes are extensive, challenging to execute and may require the involvement of 50 state legislatures and state attorneys general. This can affect the timeliness and substance of any outcome.
The states’ efforts may improve the regulatory environment for fintechs and financial innovation along the edges. However, the only viable long-term solution to the problem of a fragmented regulatory framework may be federal legislation if the NYDFS ruling is not reversed on appeal.