On March 31, 2016, the Office of the Comptroller of the Currency (“OCC”) issued its much anticipated white paper on the role of financial technology (“FinTech”) in the financial services industry. The paper, titled Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective, opens a two-month window in which banks, FinTech companies and lenders may engage in discourse with the OCC regarding the role of federal agencies in regulating FinTech. Comments on the paper are due by May 31, 2016; the OCC has scheduled a FinTech forum for July 23, 2016, at which industry commentary on the paper presumably will be discussed.
The importance of FinTech has steadily increased over the last five years to the point that it is mentioned almost daily in trade journals, newspapers and other media outlets. It is a hot topic at conferences and foremost on the mind of lenders and financial services providers. As is evident from the white paper’s publication, FinTech has become so interwoven in the financial services tapestry that it now has the dubious honor of being subject to federal government scrutiny.
In his prepared remarks at Harvard’s Kennedy School of Government announcing the white paper on the same day it was released, Comptroller of The Currency, Thomas J. Curry, signaled the OCC’s willingness to embrace FinTech:
Not every innovation is appropriate for a regulated financial institution, and not every innovation that is appropriate for a regulated institution is appropriate for all regulated institutions. But avoiding new approaches completely is equally dangerous. Banks have to continuously adapt to prosper, and we, as regulators, have to be knowledgeable enough to understand new technology and nimble enough to render timely decisions on matters requiring regulatory approval, as well as guidance about our supervisory expectations.”
Comptroller Curry’s remarks echo those of the Senior Deputy Comptroller and Chief Counsel at the Office of the Comptroller of the Currency (OCC), Amy Friend. Candidly speaking about the OCC’s lack of internal infrastructure to respond to FinTech, Ms. Friend noted, “There are so many disparate points of entry now and we don’t have a way to collect all of that information and come up with a consistent way of evaluating something that’s innovative and then rendering an opinion.” The OCC’s white paper is an important first step in that process.
The OCC published the white paper with the goal of creating “a regulatory framework that is receptive to responsible innovation along with the supervision that supports it.” The OCC defines “responsible innovation” as “[t]he use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank’s overall business strategy.”
In further support of the development of a framework for regulating FinTech, the OCC sets forth eight guiding principles:
- support responsible innovation;
- foster an internal culture receptive to responsible innovation;
- leverage agency experience and expertise;
- encourage responsible innovation that provides fair access to financial services and fair treatment of consumers;
- further safe and sound operations through effective risk management;
- encourage banks of all sizes to integrate responsible innovation into their strategic planning;
- promote ongoing dialogue through formal outreach and;
- collaborate with other regulators.
Each of these principles should be adopted not only by the OCC, but also by federal banks when developing relationships with FinTech providers and alternative lenders. (Although the OCC’s jurisdiction does not extend to state banks, these institutions should pay close attention to the white paper as the Fed and the Federal Deposit Insurance Corporation (FDIC) likely will adopt similar views in their supervision of FinTech and marketplace lending.)
The white paper concludes by inviting comment on nine questions. Two of these questions are directed at community banks and focus on the challenges these smaller banks face when implementing FinTech. A third question, which is directed at FinTech companies and marketplace lenders, asks how the OCC can provide guidance to non-banks on the agency’s expectations for FinTech.
The OCC’s white paper is certainly good news for the financial services industry. As a threshold matter, it sends a strong signal that the OCC recognizes the importance of, and is committed to embracing FinTech. Comptroller Curry made this evident in his remarks: “we want to foster an internal culture that is receptive to new technology and new ways of doing business.” In addition, the paper invites discourse between federal regulators, banks and FinTech providers regarding future federal regulations at an early stage of the process.
The challenge for the financial services industry will be to assist the OCC in establishing a structure that is responsive to the constantly evolving technological world, while allowing for appropriate deliberation on how technology will interact with sound banking fundamentals. While the OCC, along with the Fed and the FDIC, are carefully reflecting on their supervisory roles vis-à-vis FinTech, the industry must take responsibility by responding to the nine questions posed by the OCC. These questions provide a crucial opportunity for banks and technology companies to influence the role the OCC should have in regulating FinTech. Comments may be submitted either directly by a bank or technology company, or through a third party, such as outside legal counsel.
A copy of the white paper may be found on the OCC’s website, www.occ.gov.