On July 31, 2018, the Office of the Comptroller of the Currency (“OCC”) announced that it would begin accepting applications for national bank charters from Fintech entities that are engaged in the business of banking that do not take deposits. This follows an announcement by the OCC in December 2016 that it was exploring special purpose national banking charters for such entities and outreach by the OCC with stakeholders.
The OCC’s chartering authority includes the authority to charter “special purpose national banks”, for example trust banks and credit card banks. A special purpose national bank must conduct at least one of the following functions: fiduciary activities, receiving deposits, paying cheques, or lending money. Fintech entities engaging in such activities are being granted the option to apply for a special purpose national bank charter.
The national Fintech banking charter is an “opt in” regime. Fintech entities are being offered the option of applying for national Fintech bank charters should they choose to, but are not required to do so. Fintech entities retain the ability to choose other structures such as state banking charters or other types of licences (eg. money transmission licences or lender licences).
In its Policy Statement on Financial Technology Companies’ Eligibility to Apply for National Bank Charters, the OCC has confirmed that existing chartering standards and procedures will apply to applications by Fintech entities, and that the OCC will consider “whether a proposed bank has a reasonable chance of success, will be operated in a safe and sound manner, will provide fair access to financial services, will treat customers fairly, and will comply with applicable laws and regulations.”
The OCC stressed that a company receiving a Fintech bank charter “will be subject to the same high standards of safety and soundness and fairness that all federally chartered banks must meet”, “including with respect to capital, liquidity, and risk management.” The OCC also indicated that applicants will be required to “demonstrate a commitment to financial inclusion” to be approved. In addition, applicants will be required to submit a contingency plan (living will) addressing financial stress.
The OCC also reiterated that it will not approve applications contrary to applicable law, that existing restrictions on the type of business that a bank can conduct will remain applicable and that it will not accept applications which include services or products that have “predatory, unfair, or deceptive features or that pose undue risk to consumer protection”.
State Opposition to National Fintech Charter
US state financial regulators had generally expressed opposition to the concept of a national banking charter for Fintech entities when first proposed, as seen in the New York State Department of Financial Services’ (“NY DFS”) comment letter to the OCC. State regulators filed a court challenge to the initial proposal for a Fintech charter by the OCC, which was dismissed by the courts as premature.
In response to the July 31, 2018 announcement, the NYDFS issued a press release stating that it “strongly opposes [the] decision by the Office of the Comptroller of the Currency to begin accepting applications for national bank charters from nondepository financial technology (fintech) companies. DFS believes that this endeavour […] is clearly not authorized under the National Bank Act.”
There is currently no equivalent concept in Canada to “special purpose national banks” and the Bank Act generally treats banks that are chartered in Canada that engage in limited activities in the same manner as those who are full service banks. Introducing a similar concept in Canada would be a significant change to the Bank Act.
Like the US, financial services regulation in Canada spans both the federal and provincial sphere. Under the Canadian constitution, “banking” and the “incorporation of Banks” are exclusively under federal jurisdiction, while “property and civil rights in the province” are under provincial jurisdiction (resulting in a number of areas of law governing Fintech entities such as securities law, consumer protection laws, etc. falling under provincial jurisdiction). Accordingly, expanding the scope of federal jurisdiction to Fintech entities in Canada by way of a national Fintech charters could likewise trigger similar tensions between federal and provincial legislators.