Task Force Considers Fintech Regulation

Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

The newly formed House Financial Services Committee’s Task Force on Financial Technology (Committee) recently held its first hearing, and it included some interesting perspectives from both U.S. and U.K. regulators.

At “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation,” lawmakers heard testimony from representatives of the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), the Conference of State Bank Supervisors (CSBS) and the United Kingdom’s Financial Conduct Authority (FCA).

What happened

In June, the Committee unanimously passed a resolution to form the Fintech Task Force, making it responsible for examining regulation in the United States and overseas, the use of alternative data for loan underwriting and modifications, payment efficiency, and challenges to data privacy.

Tackling the first issue, the Task Force convened state, federal and foreign regulators for a hearing.

Paul Watkins, assistant director of the Office of Innovation at the CFPB, discussed the Bureau’s creation of an Office of Innovation and proposal to launch a Disclosure Sandbox.

Watkins also noted the CFPB’s collaboration with other regulators and efforts to engage with stakeholders on the issue of innovation. “Through these engagements, the Bureau is building a significant knowledge base about innovation in the markets for financial products and services,” Watkins said.

OCC’s Chief Innovation Officer Beth Knickerbocker explained that the agency has been focused for the past four years on “responsible innovation,” balancing innovation with prudent risk management. Initiatives include the establishment of the OCC’s Office of Innovation as well as a Pilot Program to test innovative products, services and processes.

Knickerbocker also referenced the agency’s efforts with regard to special purpose national bank (SPNB) charters for fintechs, calling the OCC’s decision to consider such applications “the product of considerable research and extensive outreach with stakeholders.” To date, the agency has not received any “formal applications” for this type of charter, she testified, noting that litigation is ongoing.

Valerie Szczepanik, associate director of the Division of Corporation Finance and senior advisor for digital assets and innovation, shared with legislators the work being performed by the SEC’s Strategic Hub for Innovation and Financial Technology, or FinHub. The agency has focused “a significant amount of attention and resources” on digital assets and initial coin offerings, Szczepanik said.

The CSBS representative, Charles E. Clark, director of the Washington Department of Financial Institutions, provided a counterpoint to the OCC’s discussion of SPNB charters. Only Congress has the power to permit the agency to issue such charters to nonbanks, he said, and a federal fintech charter would “disrupt the market by picking winners and creating losers, drawing a handful of large, established entities and giving them a competitive advantage over new market entrants that have historically injected innovation into our financial system.”

Nonbank financial services are “a large part” of the state regulatory ecosystem, he noted, and state regulators are “actively involved in ongoing efforts to leverage technology and data as regulatory tools to transform state supervision.” State oversight permits a small company to enter the system and be competitive with an innovative idea, Clark added.

Finally, Christopher Woolard, a board member and director of strategy and competition for the FCA, offered an international perspective on fintech regulation from the U.K. The agency established Project Innovate in 2014, launching a sandbox for firms to test innovative products and services in June 2016. Of the 110 participants, 80% went on to full operation in the market, he told the Task Force.

To watch the hearing and read the prepared statements of the witnesses, click here.

Why it matters

These are useful meetings for Congress, regulators and the public. The Task Force hearing offered a wide range of perspectives on fintech regulation from various agencies, from the OCC to the U.K.’s FCA, providing input for policy discussions. Future hearings will turn to issues such as the use of alternative data for loan underwriting and modifications, payment efficiency, and challenges to data privacy.

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.

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