In October, the Office of the Comptroller of the Currency announced plans to establish a new office dedicated to responsible innovation in the financial technology, or fintech, sector. The OCC’s plan is for this Office of Innovation to begin operating sometime during the first quarter of 2017.
One of its first priorities will be to create a new federal charter for fintech firms. On Dec. 2, the OCC announced the agency will move forward with considering applications from fintech companies to become special purpose national banks. This will create a national regulatory framework for fintech companies.
The OCC published a white paper in conjunction with the December announcement that described in more detail the issues and conditions it would consider in granting special purpose national bank charters to fintech companies. Agency officials cite several reasons why doing so will be beneficial, primarily because they believe it will be in the best interest of the public.
“It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters,” said Comptroller of the Currency Thomas J. Curry when speaking at the Georgetown University Law Center in Washington D.C., in December about the fintech national charter.
Curry also noted that considering fintech charter applications gives fintech firms a choice without creating a requirement to seek a charter. “Companies that seek a charter are evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection and strong capital and liquidity,” Curry said during this speech.
Currently, fintech firms are supervised at the state level. By creating a national charter, the OCC would shift oversight and supervision of fintech firms from state regulators to the federal government.
Enacting a national charter for fintech firms has been met with both approval and opposition. Among the most vocal opponents are commercial banks and state regulators. Many banks believe establishing a limited fintech charter will create an uneven playing field between nonbank online lenders and traditional commercial banks.
“ICBA has been deeply concerned that nonbank online lenders’ lack of oversight has provided them with regulatory advantages over other institutions, such as highly regulated community banks,” said Christopher Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “Establishing a limited fintech charter could create an environment in which fintech firms are regulated much lighter than commercial banks.”
Some banking officials are concerned fintech firms would not be subject to many laws and regulations that traditional banks are subject to, including compliance with the Community Reinvestment Act. “Any limited fintech charter must hold these companies to the same standards of safety, soundness and fairness as other federally chartered institutions,” Cole said.
Another concern of banks is that fintech companies haven’t been well-defined. The OCC has stated that a “special purpose bank must conduct at least one of the three core banking functions, namely receiving deposits, paying checks, or lending money.” While this definition appears to include online lenders, it’s not clear whether it also includes new financial technologies such as virtual currency or bitcoin exchanges.
In an article published in American Banker in October, Illinois Department of Financial and Professional Regulation Secretary Bryan A. Schneider argued against creating a federal fintech charter. “Our regulatory approach has been to focus on business activity, not technology,” Schneider wrote. “To do the reverse would be like the tail wagging the dog.”
The Conference of State Bank Supervisors also opposes a national charter for fintech firms. “Rather than adapting our financial system to the possibilities enabled by technology, the OCC would put a stop sign on innovation through a regulatory regime that favors the entrenched over the emerging, circumvents consumer protection, and weakens the dual banking system,” CSBS President and CEO John W. Ryan said in a news release.
In a comment letter, the CSBS cited four specific concerns about creating a new federal charter for fintech firms:
- It would likely distort the marketplace by centralizing authority for perhaps all non-depository activities within a single regulator.
- The OCC already has a history of preempting state consumer protection laws.
- The OCC lacks statutory authority to create a charter for fintech firms that only perform nondepository functions like lending or paying checks.
- State regulation of fintech firms supports financial services innovation though a choice in regulatory regimes.
Among those in support of a national charter for fintech firms are the Coin Center, a nonprofit organization that focuses on policy issues surrounding virtual currencies. In a comment letter filed in response to the OCC’s white paper, the Coin Center praised the OCC for recognizing that they may have a “low risk tolerance for innovative products and services.” This, in turn, can result in “a deliberate and extended vetting process that can discourage innovation inadvertently,” the Coin Center wrote in the comment letter.
Peter Van Valkenburgh, the Coin Center’s director of research, said the regulatory problems facing fintech firms are primarily structural. “We have too much overlapping and incongruous regulation thanks to our state-by-state approach to money transmission licensing,” he said. “Also, those regulations often take a rules-based rather than principles-based approach. The result is a minefield of prescriptive and inflexible compliance obligations that differ state by state.”
In contrast, Van Valkenburgh points to the United Kingdom, where there’s only one regulator. “That’s a lot easier than some 53 states and territories along with a handful of federal agencies,” he said. Van Valkenburgh also noted that the approach in the U.K. is principles-based, and thus it forgoes rigid and often obsolete check-the-box requirements in favor of a cooperative dialog between innovators and regulators.
“The OCC is in a prime position to remove the barriers to American competitiveness,” Van Valkenburgh said. “It can do so by creating a lightweight, limited-purpose federal charter for fintech firms that mirrors the regulatory environment of the U.K.”
Individuals can download and review the OCC white paper “Exploring Special Purpose National Bank Charters for Fintech Companies” from the OCC’s website. The deadline for comments on the plan was Jan. 17.
Freelance writer Don Sadler contributed to the writing and research of this article.