The U.S. fintech sector is in danger. There is a real risk that financial innovation will fall between the cracks of what is already a convoluted system of regulation in this country. That is bad for everyone. It's bad for the innovators and the public, bad for existing institutions and even bad for the regulators themselves.
Brexit may give the U.S. and other fintech centers some competitive breathing room as London struggles to maintain its fintech edge. The U.S., however, needs more than breathing room. It needs regulators to recognize the fragility of innovation. Simply integrating fintech into our current financial regulatory landscape would be a mistake. Our regulatory regime is too unwieldy.
A big concern about the U.S. regulatory system is that it is fragmented. That leads to confusion about how a firm will be subjected to regulatory oversight. The last thing that a fintech startup needs is more uncertainty. The countries with supervisory certainty will have a distinct advantage in seeing their fintech sectors grow.
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That the U.S regulatory system is too complex is not just my opinion. It is the opinion of no less than the U.S. Government Accountability Office — the audit, evaluation and investigative arm of Congress.
In March the GAO released a cogent and readable report titled "Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness." The report does an admirable job of explaining the challenges facing regulators. Along with infographics, the report plainly shows how U.S. regulation has become a perplexing Gordian knot.
The report is focused on weaknesses in the overall regulatory structure. Fintech, of course, represents only a sliver of the U.S. financial institutions industry. However, it is easy to connect this convoluted structure to concerns about fintech startups — along with the innovations they foster — being subjected to confusing and potentially crippling regulatory supervision should fintechs be incorporated into the current regulatory scheme.
The irony is that regulators do apparently understand the need to nurture this promising new industry. The Office of the Comptroller of the Currency is certainly making an effort, taking the lead among U.S. bank regulators in addressing fintech-related issues. Comptroller Thomas Curry recently hosted a conference on responsible innovation and is said to be examining the possibility of limited-purpose charters for fintech firms.
In fact, the OCC issued a white paper in March in which the agency outlined how regulators might encourage innovation while ensuring safety and soundness. These steps must sound encouraging to a fintech entrepreneur. The problem is the one raised by the GAO: the current system needs to be streamlined.
While the OCC is working hard to boost innovation, it is just one of the many supervisory bodies that may have a say over financial innovation. I say "may" because it is not entirely clear where the authority to regulate lies. Even in its own white paper, the OCC acknowledges that it needs to collaborate with other regulators, establish regular channels of communication and use best efforts to avoid inconsistent communications.
Besides the OCC, the potential regulatory sphere for fintech disruptors could touch any number of the following financial regulators: the Federal Reserve Board, Consumer Financial Protection Bureau, the Financial Industry Regulatory Authority, the Securities and Exchange Commission and the Federal Deposit Insurance Corp. That is not to mention the 50 state regulators, many of which already regulate fintech firms. While banks and other financial institutions have multiple supervisors, at least they know who is responsible. With a fintech firm, nothing is definitive at this point.
Even bankers agree that the U.S. lags other countries in the way we regulate innovation. Rob Nichols, president of the American Bankers Association, wrote, "Our regulators can learn much from Britain about how to stimulate new ideas from outside banking and to integrate them under a common set of regulatory expectations."
Most financial regulation was written long before the technological advances driving fintech were created. Even the Dodd-Frank Act of 2010 was drafted before the recent surge in investment in the area. The solution could be as simple as designating a primary regulator for financial innovation, or perhaps designating a new partnership between agencies.
Until there is clarity on the subject, fintech firms, their management and their investors will remain at risk, and American financial innovation is bound to suffer.
Richard Magrann-Wells is executive vice president for Willis Towers Watson Financial Institutions Group. Follow him on Twitter @banklawguy.