Fintech regulation has presented a confusing picture here in the United Sates for several years now. Various federal agencies have at least some measure of control over fintech companies, and it can be challenging for innovative new startups to figure out which regulatory authority they are supposed to be talking to at any stage of the game.
Because of this confusion, there is a risk that we could fall behind the rest of the world as nations including Singapore and the United Kingdom have taken steps to provide their fintech companies with the benefits of a looser regulatory environment. Both nations have developed what they are calling fintech “sandboxes” to encourage and accelerate the development of new ideas and products for the financial services industry. Emerging countries like Thailand and Abu Dhabi are also promoting their version of the fintech sandbox to attract new companies and investment dollars into their economy.
There are some signs that the U.S. is also moving to relax regulation and encourage fintech innovation. I talked recently with William Stern, a partner at alaw firm whose practice focuses on both banking and financial technology. Stern says he is seeing some positive movement among U.S. regulators on the fintech front.
Stern referenced the Financial Services Innovation Act of 2016, introduced by Rep. Patrick McHenry, R-N.C., in September of this year. The bill creates a program similar to that used in the U.K. and would allow innovative new companies to apply to one or more of the agencies that currently oversee the financial services industry for a waiver of certain regulations and requirements. It would also prevent other agencies from introducing enforcement actions against the companies while the agreement was in place.
Stern noted that for a smaller company facing the full brunt of all the rules and regulations from a multitude of agencies including the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau, the Securities and Exchange Commission and the Office of the Comptroller of the Currency, it can be incredibly discouraging for a young entrepreneurial company, particularly one with limited funding. Entering into a compliance agreement would allow the firm to move forward, test and introduce new products without falling under the full weight of the combined rules and regulations at various levels of government.
Stern believes there is support on both sides of the aisle in Congress for encouraging financial innovation, but he also points out that the banking industry isn’t necessarily a big fan of relaxed regulation for fintech companies. Allowing smaller fintech concerns to operate without complying with the same rules as banks would place the latter at a disadvantage. Concerns about maintaining a high level of consumer protection have also been expressed.
For his part, Rep. McHenry thinks the legislation is needed to keep companies from leaving the U.S. and taking their innovation to countries with a less onerous regulatory environment. “Innovation in financial services has created more convenient and secure ways to meet the demands of American consumers," McHenry said in a statement when he introduced his bill. "For these to succeed, however, Washington must rethink its own laws and regulations to keep up with the growth and creativity in the private sector. This bill represents a mindset shift in the way we address financial regulation. Rather than the command-and-control structure of the past, my bill establishes an evolved regulatory framework that encourages financial innovation, all while maintaining our regulators' commitment to the safety of consumers and our financial markets."
The bill is still in the early stages of the legislative process and is highly unlikely to be passed this year. McHenry has acknowledged this but hopes it will spark discussions that will carry over into the next congressional session, which will begin in January. The bill will likely face substantial opposition from those who favor greater rather than reduced regulation of financial services—a position generally associated with the Democratic Party—so the outcome of the congressional races on Nov. 8 could have a huge impact on the prospects for passage.
Both the OCC and the CFPB have been encouraging innovators to work closer with them so the agencies can help them navigate the compliance waters. Back in March, the OCC released a paper titled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.” When the report was introduced, Comptroller of the Currency Thomas J. Curry said that “At the OCC, we are making certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and supervision that supports it.” The paper outlined eight principles the agency thinks should guide financial innovation and was viewed by many as the first step towards making it easier for innovators to deal with regulators.
As other nations around the world develop and embrace the sandbox concept, there is some legitimate concern that the U.S. will see companies and jobs leave for a more relaxed environment elsewhere.