Since Comptroller of the Currency Thomas J. Curry announced last December that the OCC will move forward to consider granting special purpose national bank charters to financial technology companies—under the OCC’s existing authorities—the banking industry has grappled with the various dimensions of the agency’s “responsible innovation framework.” Soon after the OCC issued its December 2016 paper, Exploring Special Purpose National Bank Charters for Fintech Companies, we addressed the key elements of the OCC’s initiative for fintech companies.
Following Comptroller Curry’s speech in New York City, on March 6, the OCC has issued a “Draft Supplement” to the Comptroller’s Licensing Manual that would, if adopted, provide the substantive standards and procedures for the OCC’s evaluation of an application by a fintech company for a charter as a special purpose national bank. In the OCC’s March 15 press release announcing the Draft Supplement, the OCC states that comments are invited and should be, submitted not later than April 14, 2017.
New and existing players offering financial products or services should consider whether, and how, the OCC’s initiative to grant a special purpose national bank charter could open opportunities—particularly since Comptroller Curry now explains that the OCC “will be issuing charters to fintech companies engaged in the business of banking because it is good for consumers, businesses, and the federal banking system.”
Plenty has emerged during the past few months, and we highlight a handful of developments on the OCC’s initiative for fintech companies. In a separate bulletin soon to follow, we will focus on the OCC’s Draft Supplement.
From the OCC—
In his speech on March 6, 2017, in New York City, Comptroller Curry elaborates on several aspects of the OCC’s December 2016 paper.
- OCC’s Standards and Procedures: Most important—since so many have asked ‘exactly how is the OCC planning to set capital, liquidity, and other terms and conditions when acting on an application?’—is the announcement that the OCC will adopt a supplement to the Comptroller’s Licensing Manual to “clarify” the approach for evaluating applications.
- When? Now: The OCC has invited public comment on its Draft Supplement. While observing that soliciting comments on the agency’s procedural manuals is not “typical,” the OCC is accepting comments because that process would be “consistent with its guiding principles of transparency and fostering open dialogue with stakeholders.”
- As noted below, members of Congress and other stakeholders have ideas about the OCC’s substantive standards and procedures for allowing a fintech company to act as a special purpose national bank.
- Responsible innovation involves a firm’s commitment to “rigorous controls and governance,” and in the context of an emerging technology company, Comptroller Curry singles out the need to “[build] compliance and risk management into a company’s DNA, as early as possible in the evolution of [the company’s] business.”
- He identifies four types of “misperceptions” and addresses each as follows:
- Does the OCC have authority to grant a special purpose national bank charter to an entity that engages in one or more “core” banking functions?
Yes—and he asserts that law does not require a bank to take deposits.
- Ticket to light-touch supervision?
No—the “regular” and “on-site” supervision the OCC applies to all national banks also would apply to a special purpose national bank.
- Will the OCC “allow predatory lending and abusive practices to creep into the federal banking system?”
His answer is No. He notes that the OCC does take regulatory steps to prevent and eliminate predatory and abusive practices and that many state consumer protection laws do apply to national banks.
- Would the OCC’s initiative mix banking and commerce?
Here’s his reply: “Proposals that would mix banking and commerce are inconsistent with the OCC’s chartering standards and would not be approved.”
From Members of Congress—
- Senator Sherrod Brown and Senator Jeff Merkley, in their January 9 letter, expressed “concerns” that the OCC’s initiative for “non-bank companies” is inconsistent with the OCC’s “goals of financial stability, financial inclusion, consumer protection, and separation of banking and commerce . . . .” The Senators argue that if the OCC were to allow a special purpose national bank to narrowly focus its business, full service banking would be “undermin[ed],” potentially “decreas[ing] access to low-cost checking and savings accounts and other key aspects of the traditional banking system, further impacting working class people.”
- The Chairman of the House Financial Services Committee, Jeb Hensarling, led a fleet of House members in a joint letter, issued March 10, 2017 in order to—
- Caution the OCC not to “rush” its decision to create the special purpose national bank charter;
- Allow public comment on the contemplated supplement to the OCC’s licensing manual; and
- Commit to closely examine—possibly with a view towards overturning—the OCC’s actions in this area.
From State Officials and their Representatives—
- Several state officials—banking regulators as well as state attorneys general—submitted comments to the OCC, and generally speaking these state officials express skepticism about the scope or wisdom of the OCC’s initiative. The Attorney General of Iowa, for example, focuses on the benefits for consumer protections enforceable under state laws and urges the OCC not to disregard the existing state-law framework that applies to fintech companies.
- State agencies that regulate banks or other financial institutions affected by the OCC’s initiative—particularly licensed lenders or money transmitters—have responded, in part, by reinforcing existing measures to coordinate (g., on supervisory examinations or procedures for processing licensing applications), as well as by initiating new projects. In Chicago, the Secretary of the Illinois Department of Financial and Professional Regulation conducted two roundtables to discuss ways that state agencies could improve regulatory mechanisms.
- Might the state regulators be setting a table for work on an interstate passport framework, say, for a money transmitter or lender that meets certain qualifications?
- The Conference of State Bank Supervisors (CSBS), in its comment with the OCC, rejects the OCC’s assertion of authority under current law and opposes the “creation” of the special purpose national bank charter for a fintech company. Among other concerns, the CSBS argues that “issuance of such a charter creates tremendous uncertainty and risks pertaining to access to critical government resources, including the payments system and the federal safety net.”
- The Independent Community Bankers of America (ICBA) describes the March 10 letter from Chairman Hensarling and other House members as tracking concerns the ICBA expressed in its January comment letter to the OCC: the OCC must seek authority from Congress to issue a special purpose fintech national bank charter; the OCC should initiate a rulemaking proceeding, in accordance with the notice-and-comment procedures of the Administrative Procedure Act; and key regulatory standards—for capital as well as for aspects of safety-and-soundness—must be spelled out.
- The Massachusetts Bankers Association (MBA) expresses its support to “bring fintech firms into the mainstream regulatory system,” yet challenges the OCC to more carefully assess five areas of regulation, including whether a “pre-emptive federal charter” should be issued to a fintech company, based on the scope of its operations and business plan. Might the OCC interpret the MBA’s comment as suggesting that a special purpose national bank must agree, as a condition for obtaining its charter, to adhere to certain state laws that ordinarily do not apply to a full-service national bank?
We still believe that the OCC is reserving substantial discretion to adapt its chartering process to meet the evolving demands of fintech companies so as to promote responsible innovation in the banking industry. The next steps to be taken by Comptroller Curry—and his successor—on the OCC’s application process, the substantive standards (Capital, Liquidity, Financial Inclusion, etc.), and the applications themselves could be pivotal as fintech companies continue to explore this area of the bank regulatory landscape. Plus, because the potential benefits to a fintech company of a bespoke, special purpose national bank charter are evident, even parties who flatly oppose the OCC’s initiative are in the position of re-considering measures to promote more efficient regulatory mechanisms for banking products and services. For a banking organization, fintech company, or other financial institution that acts as a service provider—recognizing that these lines frequently are blurred in real lines of business—seeking adjustments in the regulatory framework that could help streamline delivery of its financial products or services (and make effective compliance more efficient), there is more to look out for.
For additional commentary on the OCC’s special purpose fintech charter, please see The OCC Fintech Charter: A New Model for Tech-Enabled Financial Services.