Regulators Continue Push for Financial Innovation. Speaking at the American Bankers Association Annual Convention in New York City, Federal Deposit Insurance Corporation (FDIC) Chairman Jelena McWilliams yesterday announced that the FDIC plans to establish an innovation office to encourage banks to innovate and adapt to technological changes. Ms. McWilliams’ statement was the latest in a series of announcements of federal financial regulators establishing innovation or technology-focused units. On July 31, the Office of the Comptroller of the Currency (OCC) finalized plans to accept applications for a limited purpose national bank charter for FinTech firms. On the same date, the U.S. Treasury Department released a report in which it endorsed regulatory sandboxes and made other recommendations intended to promote FinTech. More recently, the Consumer Financial Protection Bureau’s (CFPB) Office of Innovation proposed a “disclosure sandbox” to test new forms of customer communications. As discussed below, the Securities and Exchange Commission (SEC) recently announced plans to launch its Strategic Hub for Innovation and Financial Technology (FinHub), a portal that will support the SEC’s engagement with innovators, developers, entrepreneurs, and the general public on FinTech developments.
During the lengthy debate about whether the OCC should accept applications for a limited purpose FinTech charter, financial innovation took a back seat to regulatory relief and the enactment of S. 2155. With the FDIC and SEC now joining the OCC and CFPB in announcing innovation-related initiatives, it is clear that the movement by U.S. financial regulators to encourage financial innovation has regained momentum. But Ms. McWilliams’ remarks were particularly notable due to the way in which she framed the argument in favor of more financial innovation. In making her announcement, Ms. McWilliams said, “We have created the regulatory framework where we have actually discouraged banks from innovating for a number of years. So innovation has been happening outside of banking primarily, and a very small percentage of it has happened within the community banks in particular that don’t have the resources, nor are they able to enforce the compliance mechanisms in place that would be needed where the regulators would look positively at innovation.” In discussing innovation in the context of a “regulatory framework,” Ms. McWilliams explicitly recognized that, in discouraging banks to innovate, regulators have largely driven financial innovation outside of this regulatory framework. The OCC FinTech charter and the various regulatory sandboxes represent an attempt to draw financial innovators into the federal financial regulatory system by offering them the business advantages associated with being a regulated entity (deposit insurance, access to the payments system, liquidity advantages, etc.) in return for becoming subject to safety and soundness and consumer protection regulations. But these efforts also represent regulators’ recognition that, in an era of great technological change, permitting regulated entities to innovate is necessary for them to compete effectively with companies that operate outside of this system.
CFPB Updates Fall 2018 Rulemaking Agenda
On October 17, the CFPB updated its rulemaking agenda for the remainder of 2018. In the near term, the CFPB intends to:
Continue its work to implement S. 2155, the new regulatory reform law, with plans to issue rulemakings that will provide an exemption from Dodd-Frank’s mortgage escrow requirements for certain creditors with assets of $10 billion or less and develop standards for assessing consumers’ ability to repay Property Assess Clean Energy loans;
Issue a proposed rule on small dollar lending in January of 2019;
Propose to update rules relating to the Fair Debt Collection Practices Act in March of 2019; and
Issue a proposal “to address some or all” of the issues related to various Home Mortgage Disclosure Act (HMDA) projects under consideration, such as revisiting the discretionary data added in the 2015 HMDA rule.
The CFPB also moved its rulemaking on small business lending data collection to its “long-term actions” issues list and announced plans for rulemaking to define abusive acts and practices and to address consumer access to financial records.
Regulators’ Implementation of the Economic Growth, Regulatory Relief and Consumer Protection Act
On October 2, the U.S. Senate’s Banking Committee held a hearing to review regulators’ implementation of the Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155) since its passage in June. As framed by Banking Committee Chairman Mike Crapo (R-ID), the law “right-sizes regulations for financial institutions, making it easier for consumers to get mortgages and obtain credit while also increasing important consumer protections for veterans, senior citizens, victims of fraud, and those who fall on hard financial times.” View the LenderLaw Watch blog post.
FFIEC Launches Redesigned BSA/AML Website
On October 18, the Federal Financial Institutions Examination Council (FFIEC) launched its redesigned Bank Secrecy Act/Anti-Money Laundering (BSA/AML) website. The BSA/AML website provides bank examination procedure information to the banking industry and the general public. The website redesign improves site navigation and search capabilities. Most significantly, the redesigned website now allows users to download sections of the FFIEC BSA/AML Examination Manual.
SEC Launches FinHub
On October 18, the SEC announced the launch of its Strategic Hub for Innovation and Financial Technology (FinHub), a portal that will support the SEC’s engagement with innovators, developers, entrepreneurs, and the general public on FinTech developments, including blockchain and distributed ledger technology; automated investment advice; digital marketplace financing; and artificial intelligence/machine learning. FinHub will be led by Valerie A. Szczepanik, Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC’s Division of Corporation Finance, and staffed by SEC representatives with FinTech expertise and involvement. FinHub replaces the previously established FinTech@sec.gov contact address, and persons wishing to contact FinHub staff should now use this FinHub form on FinHub’s webpage.
Client Alert: SEC Report Cautions Public Companies on Internal Controls and Cybersecurity Risks
The SEC published a report of an investigation (Report) into whether certain public companies that suffered financial losses as a result of cyber-related fraud violated the federal securities laws by failing to have a system of internal accounting controls that provides reasonable assurances that the company’s assets will be protected from cyber-related fraud. Although the SEC decided not to pursue enforcement action against any of these companies, the SEC published the Report to remind public companies and other market participants that cyber-related threats involving spoofed or manipulated electronic communications are increasing and represent considerable risk, and should be considered when devising and maintaining a system of internal accounting controls that comply with federal securities laws. The Report emphasizes that cyber-related risks and disclosure continue to be a significant SEC priority. For more information, read the client alert issued by Goodwin’s Public Companies and Privacy & Cybersecurity practices.
FinTech Flash: So You Want to Be a Bank? Consequences of Forming or Acquiring a Depository Institution – Part 2
The second installment in this series of insights on bank charter considerations describes the consequences of operating through a depository institution charter, including capital requirements, supervision and examination by bank regulatory authorities and potential limitations imposed on controlling shareholders and investors. For more information, read the FinTech Flash issued by Goodwin’s FinTech practice.
Enforcement & Litigation
CFPB Reached $200,000 Settlement With Online Retailer and Lender
On October 4, the CFPB announced that it had entered into a consent order with an online retailer and its subsidiaries that sell products through revolving-credit accounts and installment-credit accounts, and then sell charged-off accounts to third-party debt collectors. The consent order resolves the CFPB’s allegations that the retailer and its subsidiaries violated the Consumer Financial Protection Act by substantially delaying the transfer of payments it received from consumers on charged-off accounts to the third-party debt buyers who had purchased and were attempting to collect the debts. View the Enforcement Watch blog post.