On March 31, 2016, the Office of the Comptroller of the Currency (“OCC”) issued its much-anticipated white paper on the growing intersection between financial services and technology, or “FinTech.” In his prepared remarks at Harvard’s Kennedy School of Government announcing the white paper, Comptroller Curry signaled the OCC’s openness to the FinTech industry: “Not every innovation is appropriate for a regulated financial institution, and not every innovation that is appropriate for a regulated institution is appropriate for all regulated institutions. But avoiding new approaches completely is equally dangerous. Banks have to continuously adapt to prosper, and we, as regulators, have to be knowledgeable enough to understand new technology and nimble enough to render timely decisions on matters requiring regulatory approval, as well as guidance about our supervisory expectations.” Comptroller Curry’s remarks echo recent comments by OCC Chief Counsel Amy Friend: “There are so many disparate points of entry now and we don’t have a way to collect all of that information and come up with a consistent way of evaluating something that’s innovative and then rendering an opinion.” Ms. Friend’s candor about the OCC’s lack of an internal infrastructure that is currently ready to be fully responsive to innovation, and the OCC’s commitment to move toward becoming a regulator that is more receptive to responsible innovation, further confirms the OCC’s status as a business-friendly, proactive regulator intent upon fostering a competitive financial marketplace.
In announcing this focus on the FinTech industry, the OCC provided the following definition of “responsible innovation” to help guide the discussion: “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.” In further support of the OCC’s development of its own framework for understanding and evaluating innovative products, services, and processes at OCC-regulated banks (national banks and federal savings associations), the OCC will follow eight guiding principles: (1) Support responsible innovation; (2) Foster an internal culture receptive to responsible innovation; (3) Leverage agency experience and expertise; (4) Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers; (5) Further safe and sound operations through effective risk management; (6) Encourage banks of all sizes to integrate responsible innovation into their strategic planning; (7) Promote ongoing dialogue through formal outreach; and (8) Collaborate with other regulators. We have summarized each of these guiding principles below.
OCC’s 8 Principles for Being Responsive to FinTech Innovation
1 - Support Responsible Innovation
The OCC is considering several possible approaches that it, as a bank regulatory agency, can take to better support its supervised banks in developing innovative products and services. Currently, banks may seek OCC input through formal or informal channels, such as meeting with the bank’s examination team, requesting a legal opinion, or filing a regulatory application. In order to become more proactive in assisting banks, the OCC is considering as one possible approach the creation of a centralized office on innovation that would serve as a forum to vet ideas before a bank or nonbank makes a formal request or launches a product or service. This office may also hold meetings with interested stakeholders, or leaders from the FinTech industry. The OCC is also looking at ways that it can streamline the application process, as well as considering the development of new procedures where existing procedures may not work for certain innovative activities.
2 - Foster an Internal Culture Receptive to Responsible Innovation
The OCC acknowledges that “a key component of a successful framework is an agency culture that is receptive to responsible innovation.” The OCC notes that it will develop or augment existing training to better enable OCC examination, legal, and other functions to be more responsive to innovation.
3 - Leverage Agency Experience and Expertise
In addition to its existing team of examination, legal, and information technology professionals, the OCC is considering designating lead experts on responsible innovation who could support bank supervision and provide advice based on a broad view of innovation trends and developments across the federal banking system. This would be similar to the existing lead expert program in retail and commercial credit, compliance, bank information technology, asset management, and operational risk to support examiners and supervised banks.
4 - Encourage Responsible Innovation that Provides Fair Access to Financial Services and Fair Treatment of Consumers
Similar to regulatory review required of other financial products and transactions, the OCC will consider if and how proposed innovation will help banks to fulfill their public purpose in promoting fair access to financial services and fair treatment of consumers. The OCC is planning on sharing success stories describing how supervised banks have innovated to increase access to unbanked and underbanked populations; to increase the speed, efficiency, effectiveness, and transparency of financial transactions; and to lend and invest in ways designed to address the credit needs of low- and moderate-income individuals and communities. The OCC may also issue new guidance on how innovation may intersect with the requirements under the Community Reinvestment Act (“CRA”), perhaps by issuing new supplemental CRA Q&As.
5 - Further Safe and Sound Operations Through Effective Risk Management
According to the OCC: “Effective risk management and good corporate governance are fundamental for banks to develop new products, services, and processes successfully.” The OCC stresses that banks of all sizes “should ensure that effective corporate governance and risk management meet supervisory expectations when considering new products, services, and processes.” This includes expectations described in OCC guidance related to strategic planning, evaluating new products and services, using models, operational risk, cybersecurity, and managing third-party relationships.
6 - Encourage Banks of All Sizes to Integrate Responsible Innovation into Their Strategic Planning
The OCC notes that a bank’s decision to offer innovative products and services should be consistent with the bank’s long-term business plan, rather than following the latest fad or industry trend. Any innovation proposal must consider the traditional strategic planning criteria, such as: (1) Consistency with the bank’s corporate governance, business plan, and risk appetite; (2) Realistic financial projections; (3) Adequate staff, both in number and expertise; (4) Technology support; (5) Consideration of all applicable risks, including reputation and compliance, and appropriate risk management systems and practices; and (6) Exit strategies.
7 - Promote Ongoing Dialogue Through Formal Outreach
The OCC intends to incorporate outreach to all stakeholders, including banks, nonbank innovators, and consumer groups in order to stay abreast of the cutting-edge trends, developments, and issues of the FinTech industry. As part of this effort, the OCC is planning to hold workshops and meetings to discuss responsible innovation. The OCC also intends to host “innovator fairs” to bring together banks and nonbank innovators, with OCC experts to further share ideas on how regulators can be responsive to innovation.
8 - Collaborate with Other Regulators
The OCC has made clear that it will partner and share information with other federal and state regulatory agencies, including specifically the Consumer Financial Protection Bureau (“CFPB”). This, the OCC expects, will help to “promote a common understanding and consistent application of laws, regulations, and guidance.”
Implications for Banks and the FinTech Industry The OCC’s FinTech white paper is certainly good news for the banking and technology industries on many levels.
As a threshold matter, it sends a strong signal that the country’s premier banking regulator appreciates the important and emerging role that FinTech plays. For a regulatory agency created at the urging of President Lincoln in 1863, it is truly refreshing that the OCC is constantly searching for ways to be more adaptive to the changing financial services environment.
Second, and of particularly welcomed news, the OCC appears committed to facilitating discussions between innovators and regulators early-on in the development process. By the OCC making its examination, legal, and information technology professionals available to innovators, such innovators will be in a better position to evaluate the regulatory implications and permissibility of proposals at the inception of design and development, before too many resources are devoted to a project that may carry fatal regulatory flaws.
Third, we are likely to see increased collaboration between the OCC and the CFPB in the evaluation of innovative products and services. This may take two forms. On a macro level, we may see the OCC and CFPB collaborate in terms of setting examination guidelines for the development of consumer financial products and services. On a more micro level, we may also see innovators engaging in consultations with the OCC examiners simultaneously with CFPB examiners. This would help to avoid inconsistencies between regulators, and allow for greater brainstorming of the supervisory implications of new proposals. I suspect that we are not likely to see greater collaboration between the OCC and the Federal Deposit Insurance Corporation or the Federal Reserve Board, as, unlike those prudential regulators, the OCC (as a chartering agency) determines the powers of its supervised institutions, which is fundamental to product and service innovation, i.e., a supervised bank must first have the authority to offer the item.
Fourth, the OCC’s announcement may signal an openness to small-dollar lenders. In its white paper, the OCC notes that “there is great potential for responsible innovation to broaden access to financial services by delivering more affordable products and services on suitable terms to unbanked, underbanked, and low- to moderate-income consumers,” particularly through small-dollar, unsecured consumer loans. This is an area where lenders of all types have found themselves caught between public policy goals of providing access to credit to a population that is often shut out of the market, and offering an inherently risky product (small-dollar unsecured loans).
Fifth, the OCC was careful to note that in evaluating financial innovation proposals, it will consider the application of the OCC’s third-party relationships guidance, which requires banks to be vigilant in vetting potential third parties, evaluating contract provisions, and conducting ongoing monitoring of third parties. For technology companies that want to partner with banks, this will mean that while the OCC may be more open to cross-collaboration in the FinTech industry, the price for entering into a relationship with a national bank or federal savings association will continue to be consenting to a certain degree of OCC oversight of that relationship.
Conclusion On the whole, the OCC’s message is clear – bank regulators are open to technological innovation. Comptroller Curry made this evident in his remarks: “[W]e want to foster an internal culture that is receptive to new technology and new ways of doing business.” The challenge for the banking and technology industries will be to assist the OCC in helping the agency to establish a structure that is responsive to the constantly evolving technological world, while allowing for appropriate deliberation on how that technology impacts safety and soundness.
Industry can begin to meet this challenge immediately by reviewing the nine questions posed at the end of the OCC white paper under “Request for Comments.” This section provides a crucial opportunity for banks and technology companies to help influence the tone and direction for the continued discussion of the appropriate role that the OCC should have in creating an environment that encourages and facilitates responsible innovation. These comments can be submitted either directly by a bank or technology company, or through a third party, such as outside regulatory counsel.