Investments in financial technology companies like Prosper, SoFi, Lending Club, and Kabbage have reached record levels in recent years. These companies upend the traditional banking model through peer-to-peer lending, non-bank marketplace lending, app-based loans, and other innovations. Yet under current rules, these firms are subject to an array of different state restrictions.
However, a new announcement by the Office of the Comptroller of the Currency (OCC), a national banking regulator, indicates that the OCC will seek to regulate financial technology (FinTech) companies under a single national standard that provides a different set of rules than those that currently govern the growing industry.
Most national banks operate under documents called charters—licenses that permit banks to do business under unified federal rules that require them to operative in a safe and effective manner, instead of subjecting them to varied state banking regulations. The OCC’s decision would mean that that FinTech companies, too, could apply to operate under a national charter.
The Agency previously signaled in a recent rule proposal that it might be open to regulating FinTech companies differently, a direction confirmed by Comptroller of the Currency Thomas Curry in remarks at the Georgetown University Law Center. “It will be much better for the health of the federal banking system and everyone who relies on these institutions, if these companies enter the system through a clearly marked front gate, rather than in some back door, where risks may not be as thoughtfully assessed and managed,” Curry stated in his prepared remarks.
Advocates for a special purpose FinTech charter included FinTech companies that previously needed to operate as a money services business (subjecting them to more stringent bank account compliance regimes), obtain licensing in separate states, or partner with an existing chartered bank. They argued that a special charter would nationalize requirements and better tailor regulation to their emerging industry, currently bearing the costs of full compliance.
“The OCC has clearly recognized the significant positive impact FinTech companies are having on our economy,” Nat Hoopes, executive director of the FinTech trade group Marketplace Lending Association, reportedly said.
However, opponents of a special purpose FinTech charter, including commercial banks, believed that FinTech companies should be regulated under the same rules that apply to traditional banks. “The last thing we want to see,” Chris Cole, executive vice president and senior regulatory counsel for the trade group Independent Community Bankers of America reportedly stated, “is a charter that has all the privileges of a commercial bank charter without the supervision and regulation that comes with a community bank.”
A special FinTech charter also raises the possibility of regulatory arbitrage, with FinTech companies changing the structure of their companies in order to be subject to regulations that they deem to be more favorable. State banking regulators have expressed skepticism about a national FinTech charter. Former Massachusetts Commissioner of Banks David Cotney reportedly stated that a special purpose federal charter could preempt state consumer protection laws and create “the beginning of a race to the bottom” for regulation of the financial industry.
Some of these points have been addressed in the wake of the OCC’s announcement. The OCC’s publication of Curry’s remarks were accompanied by a paper on the special purpose charter, which give some indication as to the OCC’s requirements for granting charter applications. The paper stated that state law would apply “in the same way and to the same extent” as a traditional national bank, but indicated that other laws, such as certain sections of the Federal Deposit Insurance Act or the Community Reinvestment Act, would not apply to FinTech firms unless they were insured by the Federal Deposit Insurance Corporation.
The paper also stated that the OCC’s baseline supervisory expectation would require a well-supported business plan, governance structure, capital, liquidity, compliance risk management, a financial inclusion plan, and recovery and resolution planning as necessary prerequisites to a successful charter application. However, the fact that many of these requirements will be evaluated on a case-by-case basis, commensurate with the company’s risk and complexity of its activities, means that standards may not be the same across the FinTech industry. The paper also signaled that the OCC would have considerable flexibility to impose additional conditions, including requiring prior OCC approval in order for the company to change its business model or significantly alter its activities.