New Guidance Clarifies OCC's Intended Approach Towards Regulating Innovation in the Financial Sector and Creates New Office of Innovation
On October 26, 2016, the Office of the Comptroller of the Currency, the regulator of federally chartered national banks and savings associations, released its Recommendations and Decisions for Implementing a Responsible Innovation Framework, which sets forth a number of specific actions that the OCC will implement when evaluating innovative financial products, services and processes and their associated risks. The OCC Framework, which builds on the OCC's previously released white paper on supporting responsible innovation in the federal banking system, represents the most extensive effort by a U.S. federal financial regulator to provide guidance for financial institutions and companies regarding the development of products and services in the financial technology ("FinTech") sector. It consists of five core components: (i) establishing an outreach and technical assistance program for banks and nonbanks; (ii) conducting awareness and training activities for OCC staff; (iii) encouraging coordination and facilitation; (iv) establishing an innovation research function; and (v) promoting interagency collaboration. In addition, the OCC announced that it will establish a new Office of Innovation which will be headed by a Chief Innovation Officer and will be tasked with implementing the OCC Framework and serving as the OCC's central point of contact and clearinghouse for requests and information related to innovation.
While not specifically addressed in the OCC Framework, the OCC also announced that it is continuing to assess whether to grant special purpose national bank charters to nonbank financial technology companies, and that it plans to publish a paper later this year that discusses the issues associated with establishing such a charter.
In August 2015, Comptroller of the Currency Thomas J. Curry announced an initiative to develop a comprehensive framework to improve the OCC's ability to identify and understand trends and innovations in the financial services industry, as well as the evolving needs of financial services consumers. The development of this comprehensive framework is intended to improve the manner in which the OCC evaluates innovative products, services and processes and the risks associated with them. It is also meant to clarify lines of communication between the OCC and the financial industry regarding emerging technology and new products, services and processes.
As the first major step in this initiative, on March 31, 2016, the OCC released a white paper that set forth its perspective on supporting responsible innovation in the federal banking system (the "White Paper"). In the White Paper, the OCC defined "responsible innovation" to mean "the use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank's overall business strategy." It also identified eight principles that are collectively intended to facilitate the development of the OCC's comprehensive framework:
- Support responsible innovation;
- Foster an internal culture receptive to responsible innovation;
- Leverage agency experience and expertise;
- Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers;
- Further safe and sound operations through effective risk management;
- Encourage banks of all sizes to integrate responsible innovation into their strategic planning;
- Promote ongoing dialogue through formal outreach; and
- Collaborate with other regulators.
Following the release of the White Paper, the OCC formed an internal Innovation Framework Development Team to come up with recommendations that would inform the development of its responsible innovation framework. The OCC also hosted a Forum on Responsible Innovation in June 2016, during which Comptroller Curry reiterated that the OCC's efforts to encourage responsible innovation were not meant to stifle growth and innovation, but rather meant to start a dialogue with FinTech companies, large and small.
To that end, the OCC has begun to consider the feasibility of creating and granting a special purpose national bank charter for nonbank financial technology companies. The creation of such a charter would be intended to provide a platform for FinTech innovation that would apply nationwide and permit a single regulator to clarify regulatory uncertainty regarding products and services that do not fit neatly into the scheme of existing regulations. However, Comptroller Curry has suggested that FinTech companies should conduct their own analysis of whether holding a limited-purpose national FinTech charter would be appropriate for their business models, noting that "whether [a national FinTech charter] works for the business model of a FinTech firm is something that sector needs to think through."
Most recently, the OCC released a proposed rule that sets forth a framework for liquidating uninsured national banks. The proposed rule addresses how the OCC would conduct a receivership for an uninsured national bank if such an institution were to fail. The OCC has acknowledged that this type of receivership might apply to an entity that has a national FinTech bank charter, noting that the adoption of clear rules governing such receiverships could facilitate the use of these entities to conduct FinTechrelated businesses.
In its introduction to the OCC Framework, the OCC explained that the recommendations and decisions that it contains were based on a detailed analysis of comments received in connection with the publication of the White Paper, a review of previously completed internal research, and feedback from ongoing meetings with external stakeholders and participants in the Forum on Responsible Innovation. Using these inputs, the OCC's Innovation Framework Development Team developed the OCC Framework, which consists of a series of recommendations that were accepted and approved by Comptroller Curry and the OCC's Executive Committee in early October.
To implement the OCC Framework, the OCC will create a new Office of Innovation, which will report directly to the Comptroller. The Office of Innovation will be tasked with implementing the OCC Framework and serving as the OCC's central point of contact and clearinghouse for requests and information related to innovation. In addition, the OCC will create a new Responsible Innovation Committee consisting of Deputy Comptrollers and Directors from OCC business units. This Committee will provide the Office of Innovation with cross-functional advice and facilitate interagency collaboration.
The Office of Innovation will be headed by a Chief Innovation Officer, and will also include Innovation Officers based in New York, San Francisco, and Washington D.C., an Innovation Technician, and potentially a small number of Innovation Fellows. The Innovation Fellowship program would aim to draw upon the experience and knowledge of academics, consumer and community advocates and the private sector, and to share the OCC's perspectives on regulation with the Innovation Fellows. The OCC expects that the Office of Innovation will begin operations in the first quarter of 2017, and has named Beth Knickerbocker to serve as acting Chief Innovation Officer.
In addition to establishing the Office of Innovation, the OCC Framework consists of the following components:
Establishing an outreach and technical assistance program for banks and nonbanks: The OCC will develop a formal innovation outreach strategy, which will include "office hours" hosted by the Office of Innovation; workshops and roundtables on specific innovation-related topics; leveraging existing OCCsponsored events such as banker roundtables and consumer and community events; sponsoring a periodic Responsible Innovation Forum; and participating in non-OCC events, when appropriate. In addition, the OCC will provide technical assistance to banks and nonbanks by creating resource material on regulatory principles, processes, and expectations and by designing "rules of the road" material for nonbanks. The OCC's efforts in this area will also include outreach to community banks on how to develop an innovation strategy and how to manage third-party risk.
Conducting awareness and training activities for OCC staff: The OCC proposes to improve staff awareness of industry innovations and developing trends by providing employees with additional resources, expanding information delivery channels and establishing an Innovation Networking Group for interested staff. The OCC will create and curate a "one-stop shop" internal webpage for employees to access information and will train staff to have a foundational understanding of financial technology and payments systems. In an effort to increase OCC expertise in innovation-related areas, the OCC's recruiting efforts will be expanded to encompass skills such as engineering, advanced information technology, systems development, cybersecurity, statistics, and mathematical modeling. In addition, the OCC will use short-term rotational assignments and on-the-job training to increase staff knowledge.
Encouraging coordination and facilitation: To improve the timeliness and transparency of its decisionmaking, the OCC will establish specific response and disposition expectations for innovation inquiries and requests; use a standard workflow to manage inquiries and requests, including process steps with specific time frames; and implement a tracking process. In addition, the OCC has conditionally approved the creation of a program for OCC participation in bank-run pilots to test innovative products, services, and processes. Developed in response to requests that the OCC create a FinTech "sandbox" or "incubator" similar to those already in place in the UK, Singapore, Hong Kong and other jurisdictions, the OCC has indicated that it supports the creation of a program that will facilitate adoption of new solutions and the enhancement of risk management by permitting testing of products and services before their full roll-out but noted that such a pilot program must be voluntary and would not provide a safe harbor from consumer protection requirements. Accordingly, the OCC has approved the development of an optional program for OCC participation in bank-run pilots that meet at least one of the following objectives: (i) the pilot fosters responsible innovation by OCC-supervised banks; (ii) the pilot furthers the OCC's understanding of innovative products, services, processes or technologies; or (iii) the pilot facilitates OCC policy objectives. OCC-supervised banks and significant service providers, FinTechs in partnership with an OCC-supervised bank or significant service provider, and other regulators would be eligible for participation in the program.
Establishing an innovation research function: The Office of Innovation will have a research function directed at collecting information on specific innovations and industry technology trends; analyzing how innovation affects individual banks, bank segments, and the federal banking system; and obtaining information on customer needs, demographics and financial inclusion. This research function will provide the OCC with real-time research and monitoring capabilities to develop more timely background material on emerging issues to promote awareness throughout the agency. In addition, the OCC will use research and dialogue with industry, consumer and community groups to enable it to offer better tailored guidance regarding key topics including third-party risk management, partnerships/collaborations and compliance with the Community Reinvestment Act.
Promoting interagency collaboration: The OCC plans to leverage its existing network with domestic and international financial regulators to discuss innovation in the financial sector. The focus of the collaboration will be to increase knowledge, articulate consistent approaches, and provide a clear message to the financial sector regarding regulatory expectations. The OCC plans to assume a leadership role by establishing an OCC-led innovation information-sharing group for regulators that will meet periodically to share information and promote responsible innovation.
In its press release announcing the OCC Framework, the OCC acknowledged that it is continuing its assessment of granting a special purpose national bank charter to nonbank financial technology companies. While not specifically addressed in the OCC Framework, the OCC announced that it plans to publish a paper later this year that discusses the issues associated with establishing such a charter.