The U.S. Department of Treasury and the Office of the Comptroller of the Currency each announced developments that pave the way for FinTech firms and other non-banks to more easily compete with traditional banks.
The first development came on July 31 from the U.S. Department of Treasury in the form of a 222-page report, “identifying improvements to the regulatory landscape that will better support nonbank financial institutions, embrace financial technology, and foster innovation,” the Treasury stated. It is the fourth report issued by Treasury, under the direction of Secretary Steven Mnuchin, in response to Executive Order 13772.
(Issued by President Trump in February 2017, the executive order called on Treasury to identify laws and regulations that are inconsistent with the Core Principles it set forth for financial regulation.)
“Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector,” Mnuchin said in a statement. “America is a leader in innovation. We must keep pace with industry changes and encourage financial ingenuity to foster the nation’s vibrant financial services and technology sectors.”
In drafting the report, Treasury said it consulted extensively with a wide range of stakeholders focused on consumer financial data aggregation, lending, payments, credit servicing, financial technology, and innovation.
“An OCC FinTech charter is a regulatory train wreck in the making.”
John Ryan, President, Conference of State Bank Supervisors
Treasury further said its recommendations “are designed to facilitate U.S. firm innovation by streamlining and refining the regulatory environment. These improvements should enable U.S. firms to more rapidly adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency.”
Treasury’s report identifies just over 80 recommendations that are designed to:
Embrace the efficient and responsible use of consumer financial data and competitive technologies;
Streamline the regulatory environment to foster innovation and avoid fragmentation;
Modernize regulations for an array of financial products and activities; and
Facilitate “regulatory sandboxes” to promote innovation.
The second development came from the Office of the Comptroller of the Currency (OCC), which announced on the same day as the Treasury report that it will begin accepting national bank charter applications from FinTech firms. “The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy,” Comptroller of the Currency Joseph Otting said in a statement.
“The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses and creates greater opportunity for companies that want to provide banking services in America,” Otting added. “Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”
The OCC said its decision follows extensive outreach with many stakeholders over a two-year period, and after reviewing public comments solicited following the publication of Exploring Special Purpose National Bank Charters for Fintech Companies in December 2016 and Comptroller’s Licensing Manual Draft Supplement: Evaluating Charter Applications From Financial Technology Companies in March 2017.
In announcing the decision, the policy statement and Comptroller's Licensing Manual Supplement stress that “every application will be evaluated on its unique facts and circumstances.” The OCC also said that FinTech firms that apply and qualify for, and receive, special purpose national bank charters “will be supervised like similarly situated national banks, to include capital, liquidity, and financial inclusion commitments as appropriate.”
Additionally, FinTech firms “will be expected to submit an acceptable contingency plan to address significant financial stress that could threaten the viability of the bank,” the OCC said. “The plan would outline strategies for restoring the bank’s financial strength and options for selling, merging, or liquidating the bank in the event the recovery strategies are not effective.”
The expectations for promoting financial inclusion will depend on the company’s business model and the types of planned products, services, and activities. New FinTech firms that become special purpose national banks will be subject to heightened supervision initially, like other de novo banks, the OCC said.
The OCC further stressed that it has the authority, expertise, processes, procedures, and resources necessary to supervise FinTech firms that become national banks and to unwind a FinTech firm that becomes a national bank if it fails.
The OCC said qualifying FinTech firms may also apply for federal charters under the OCC’s authority to charter full-service national banks and other special purpose banks—such as trust banks, banker’s banks, and credit card banks.
“A national bank charter is only one option among many for companies engaged in the business of banking,” the OCC said. “Other options include pursuing state banking charters, appropriate business licenses, and partnerships with other federal or state financial institutions.”
In a statement, Otting said, “Providing a path for FinTech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition. It also provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.”
The Treasury and OCC developments elicited both cheers and jeers. The Conference of State Bank Supervisors (CSBS), which last year filed a lawsuit opposing the OCC’s national bank charter, is expected to legally challenge it again. “An OCC FinTech charter is a regulatory train wreck in the making,” CSBS President John Ryan said in a statement.
“Such a move exceeds the current authority granted by Congress to the OCC,” Ryan added. “FinTech charter decisions would place the federal government in the business of picking winners and losers in the marketplace. And taxpayers would be exposed to a new risk: failed FinTechs.”
The CSBS also challenged certain recommendations in the Treasury report. “We do not support creation of new federal rules or unauthorized federal charters that would seek to compromise the ability of state officials to apply and enforce state laws and, so, we disagree with Treasury’s recommended changes to the valid-when-made doctrine and the true-lender doctrine, and the creation of an OCC special purpose bank charter for FinTech companies,” the CSBS stated.
Other critics include advocates at the National Consumer Law Center, Americans for Financial Reform, the Center for Responsible Lending, the Consumer Federation of America, and U.S. PIRG. Like the CSBS, these groups argued that this move is outside the authority of the OCC.
“The OCC does not have the legal authority to hand out ‘national bank’ charters to entities that do not take deposits,” said Linda Jun with the Americans for Financial Reform. “I expect the courts will stop this power grab by the OCC.”
“Giving ‘national bank’ charters to non-bank lenders could open the floodgates to a wide range of predatory actors making loans at 100 percent APR or higher,” said Lauren Saunders, associate director of the National Consumer Law Center. According to a report conducted last year by the National Consumer Law Center, two-thirds of states cap a $2,000 loan at 36 percent or less, but a non-bank charter could allow lenders to avoid those limits, Saunders said. In 2017, more than 250 organizations sent a letter to the OCC opposing a FinTech national bank charter.
The New York Department of Financial Services (NYDFS) expressed similar concerns, stating that it “strongly opposes” the OCC’s efforts. “DFS believes that this endeavor, which is also wrongly supported by the Treasury Department, is clearly not authorized under the National Bank Act,” NYDFS said. “As DFS has noted since the OCC’s proposal, a national FinTech charter will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape.”
Additionally, the NYDFS said it “fiercely opposes” Treasury’s endorsement of regulatory “sandboxes” for FinTech firms—which allow firms test out new products, services, or business models under a regulator’s supervision. “The idea that innovation will flourish only by allowing companies to evade laws that protect consumers, and which also safeguard markets and mitigate risk for the financial services industry, is preposterous,” Superintendent Maria Vullo said in a statement.
Others, however, praised the changes. Jason Oxman, chief executive of the Electronic Transaction Association, applauded the OCC for creating a “consistent and uniform regulatory framework for FinTech companies.” Oxman added, “This type of clarity benefits everyone by ensuring that industry, customers, and regulators are operating from the same rules and expectations.”