Curry in a Hurry: OCC Publishes Fintech Charter Standards

by Manatt, Phelps & Phillips, LLP
Contact

Manatt, Phelps & Phillips, LLP

A key banking regulator has published draft licensing standards that could fundamentally change how financial technology companies operate and are supervised in the United States. The new standards come in the final weeks of Comptroller Thomas J. Curry's term in office.

On March 15, 2017, the Office of the Comptroller of the Currency (OCC) published a draft supplement to its licensing manual that explains how financial technology companies may seek special purpose national bank (SPNB or fintech) charters. The move has been eagerly anticipated by fintech companies and traditional banks alike, and already has provoked strong reaction from lawmakers, regulators and industry members.

In issuing the draft, the OCC determined that fintech charters would serve the public interest by (1) establishing a framework of uniform standards and supervision for fintech companies, (2) supporting the dual banking system by offering fintech companies the option of federal or state regulation, and (3) promoting growth, modernization, competition and inclusion in the American financial system. Following a brief overview of the draft, we discuss its significance to the fintech industry and summarize reaction to the proposed licensing standards and challenges facing their adoption.

The Draft Licensing Manual Supplement

The draft licensing manual supplement explains how the OCC will apply existing licensing standards and requirements to fintech companies applying for an SPNB charter. In a companion summary, the OCC explains that SPNB charter-holders will be held to the same operational standards and subject to the same oversight as federally-chartered traditional banks. For example, fintech companies holding SPNB charters must satisfy minimum leverage and risk-based capital requirements that apply to all national banks. They will not, however, be subject to regulation by the Federal Deposit Insurance Corporation, because banks that accept deposits are not eligible for SPNB charters under the current draft. Recognizing that many fintech companies operate differently than traditional banks and therefore pose different risks to the banking system, the OCC may also impose special conditions on these companies during the application process.

These risks and any special conditions would be determined through a multistage review described in the supplement. The process begins when a fintech company submits an overview of its charter proposal to the OCC. The overview must discuss the company's business plan, including a risk assessment, description of internal controls and financial management, and summary of novel policy and legal issues raised by the company's proposal. Notably, the OCC will not approve proposals from companies whose activities commingle banking and commercial services. Although the Community Reinvestment Act applies only to depository institutions, to promote the goal of financial inclusion, the OCC also will require many fintech companies to develop and implement a "financial inclusion plan" to serve populations that are traditionally underserved by the financial industry.

Should the OCC conditionally approve an SPNB charter, the fintech company becomes subject to the regulatory requirements set forth in the approval while the company organizes and progresses toward final approval. Upon final approval, the fintech company receives its SPNB charter and may begin operating as a national association.

Industry Implications

If adopted, fintech charters could profoundly alter how financial technology companies do business in the United States. At present, fintech companies are subject to the regulation, oversight and licensure requirements of every state in which they do business. This poses considerable administrative and compliance challenges, particular for small companies that serve customers in multiple states. A national bank charter would preempt most state-level bank regulation, enabling coast-to-coast operation after a single application and subject to a single regulator's oversight. This could encourage existing fintech companies to grow their service areas and new companies to enter the marketplace, potentially expanding the reach of financial services available to consumers and small businesses.

Fintech companies' simplified access to a national market could pose competitive challenges for existing holders of national charters, particularly traditional banks already serving consumers and small businesses. Because fintech companies often have lower operating expenses, direct competition could force established industry players to offer new services or reduce the price of existing services for retail and commercial customers. Similarly, national banks that partner with fintech companies to make loans (an arrangement sometimes known as "Rent-a-Charter") would face challenges as their competitive advantage—the limited availability of national bank charters—is eroded.

By preempting most state banking laws, fintech companies that hold SPNB charters would operate largely free of state oversight. While these companies would become subject to federal banking law, to the extent that state rules are more stringent than federal regulation, customers in those states would no longer benefit from those rules. This possibility has opened the OCC's proposal to criticism described below.

The extent to which these effects would be felt in the industry remains unclear. The licensing supplement only outlines the process the OCC proposes to follow. It remains to be seen whether the final rules will render SPNB charters desirable or even viable for fintech companies. If the chartering process is too burdensome, or the attendant obligations too onerous, companies may continue to avail themselves of the existing state-by-state regulatory process. Of course, if few companies ultimately opt to obtain fintech charters, their implications for the industry would be modest.

The Path Ahead

The OCC is accepting comments on its draft licensing supplement until April 14 (comments may be submitted to specialpurposecharter@occ.treas.gov). Of note, Thomas J. Curry's term as Comptroller ends on April 9, though he may remain in the position until a successor is confirmed (the President has yet to make a nomination for the position). In the meantime, reaction to the OCC's march toward fintech charters has been swift and strong.

Earlier this month, 30 members of the House Financial Services Committee urged the OCC to take a more deliberate approach and allow the incoming Comptroller to participate in the process. Other elected officials, including Senators Sherrod Brown and Jeff Merkley, have questioned whether the OCC even has legal authority to grant fintech charters. The Conference of State Bank Supervisors, a trade group of state banking regulators, expressed concern that the new charter "preempts existing state consumer protections" and "exposes taxpayers to the risk of inevitable fintech failures."

Reaction from fintech entrepreneurs has been generally supportive, but others in the industry have been more muted in their praise. Brian Knight, a fintech policy analyst, noted that the OCC's proposal has positive aspects, but described it as "too vague" and potentially creating a "needlessly burdensome process that will hamper the very innovative firms that can best utilize this type of regulatory reform."

* * * * *

Judging from immediate reactions to the OCC's proposal, we expect it will face a long and difficult road to final adoption. The OCC is likely to receive numerous comments between now and April 14. In the meantime, trade groups and other organizations that represent members of the financial services industry will likely make their views more widely known. Ultimately, Congress may intervene.

Nonetheless, adoption of special purpose national bank charters for financial technology companies could profoundly reshape this emerging industry and transform the delivery of financial services to consumers and small businesses. We urge members of the financial services industry to monitor this process closely and consider taking steps now to take advantage of (or protect their businesses against) the availability of fintech charters.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Manatt, Phelps & Phillips, LLP | Attorney Advertising

Written by:

Manatt, Phelps & Phillips, LLP
Contact
more
less

Manatt, Phelps & Phillips, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.