Innovation in the delivery of financial products and services continues at a rapid rate. We discuss below some recent developments at the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency that illustrate the ways in which two key financial services regulators are working to keep up.
CFPB’s Innovation Insights Report
The Consumer Financial Protection Bureau provided its first Innovation Insights report in October 2016. The report provides a retrospective review of its efforts to promote consumer-friendly innovation under the “Project Catalyst” program, along with a roadmap of the agency’s future areas of focus. According to the report, dynamic and rapid growth in financial services technology has been fueled by $50 billion in global investment since 2010, $22.3 billion of which occurred in 2015.
Benefits and Risks of Innovation. The report notes that innovation can better serve customers by expanding access, improving consumer control (e.g. by aligning spending and savings habits with individualized long-term goals), reducing prices, increasing features and functionality, enhancing safety and security, and promoting transparency. At the same time, the CFPB recognizes that innovation can present “new risk of consumer harm”. For example, “the very same technology that can empower consumers in their decision-making can equally be adapted to steer consumers toward products that may not be in their best interest.” The CFPB warns that where innovations present unfair, deceptive, or abusive acts or practices, it will take action to protect consumers.
Project Catalyst’s Accomplishments. The report outlines the achievements of the CFPB’s Project Catalyst to date, including:
- Stakeholder engagement – By engaging in regular dialogue with industry, the CFPB intends to “foster an attitudinal shift and lay the groundwork for embracing and supporting positive market developments that benefit consumers.” The CFPB’s “primary vehicle for outreach to FinTech startups and others in the financial services industry” is its periodic “office-hours” program, held in New York and San Francisco, where innovators and other stakeholders can engage directly with subject-matter experts from the CFPB.
The CFPB has also coordinated with other U.S. governmental agencies on FinTech trends and emerging regulatory issues, including the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the Conference of State Bank Supervisors, the New York Department of Financial Services, and the California Department of Business Oversight. The CFPB has also established regular communications with foreign financial services regulators in the United Kingdom, Australia, Europe, China, and Canada.
- Policies to foster innovation – Recognizing that some consumer financial disclosures for complex products might not fully and effectively serve consumers, the CFPB’s Trial Disclosure Waiver Policy allows companies to test disclosure improvements that could benefit consumers using in-market tests. The CFPB notes that disclosures using “digital channels can be made interactive in ways that can help consumers better understand prices and other key terms” when shopping or using products. The CFPB has also created a no-action letter policy, which we discussed here, to allow consumer innovations to be developed where substantial regulatory uncertainty exists.
- Research collaborations – The CFPB has collaborated with companies that are testing various aspects of financial products and services to gain insight into consumers’ financial decision making. These collaborations have included: tests of a program to incentivize savings among prepaid card users and consumers receiving tax refunds, and early intervention credit counseling for consumers at risk of defaulting on their credit cards, among others.
Areas of continued focus. The CFPB is “committed to learning more about [the following] areas and leveraging its policies and programs as appropriate to help facilitate innovation”:
- Cash flow management services that facilitate employee access to accrued wages before their payday, “smooth” income by putting aside extra income in certain pay-periods to compensate for below-average pay periods, and automatically apply a portion of consumers’ wages to recurring payments.
- Improved credit assessment services that expand access by incorporating non-traditional data sources and employ machine learning.
- Consumer-permissioned access to financial data that forms the “basis for personal financial management tools and mechanisms to reduce the time to verify consumers’ accounts.” Director Cordray stated in a recent speech that the Bureau is “gravely concerned by reports that some financial institutions are looking for ways to limit, or even shut off, access to financial data rather than exploring ways to make sure that such access, once granted, is safe and secure.” The report notes that the loss of access to consumer data by these third parties “could cripple or even entirely curtail the further development of such products and services”. The CFPB has since issued a request for information on the topic.
- Mortgage lending and servicing platforms that are flexible, scalable, and have the capacity to integrate other systems, for example by automating reconciliation processes and using machine learning to detect financial distress earlier.
- Credit report access tools that enhance understanding (e.g. by simulating effects of certain action on a consumer’s credit score), providing regular updates, and facilitating error resolution, all of which aim to improve financial behavior.
- Peer-to-peer payments that enable fast, low-cost transfers of money. Other innovations allow consumers to use digital funds received in a foreign country to pay for utilities or other goods and services, and to provide real-time price comparisons for international remittances.
- Saving tools that allow consumers to determine how much they can save based on their income and expenses, and to automate savings transfers.
OCC Report and Policy Recommendations on Innovation
The OCC also issued its Recommendations and Decisions for Implementing a Responsible Innovation Framework in October 2016. The framework contains some areas of overlap with the CFPB’s work in facilitating financial services innovation. We wrote about the OCC’s earlier paper on the topic here and its Innovation Forum here.
Notable among the policies adopted was support for a voluntary pilot program in which national banks, and national banks acting in partnership with FinTech companies, can test innovative products, services, and processes. However, the pilot program “would not provide a safe harbor from consumer protection requirements.” The OCC also agreed to provide “technical assistance” on how to develop an innovation strategy and manage third-party risk, including resource materials on regulatory principles, processes, and expectations, and “rules of the road” for non-banks.
The OCC and its Executive Committee accepted these overarching recommendations:
- To create an Office of Innovation to implement its framework for responsible innovation;
- To establish an outreach and technical assistance program;
- To conduct awareness and training activities;
- To encourage coordination and facilitation;
- To establish an innovation research function; and
- To promote interagency collaboration.
PLA will continue to track and provide readers with information on regulatory approaches to financial services innovation.