On July 31, 2018, the Office of the Comptroller of the Currency (OCC) announced that the OCC will begin to accept special-purpose charter applications from fintech firms.
The OCC announcement followed a decision by the Treasury Department backing the OCC’s fintech charter concept set out in a recently published Treasury report recommending changes in the financial industry regulatory regime. Until now, fintech companies did not have a federal licensing option, and instead had to apply for licenses in each state in which they wished to operate. With the Treasury Department decision and the OCC’s announcement, the need for state-by-state licenses for those fintech entities that qualify is effectively eliminated, reducing not only regulatory burdens facing a company, but also potentially hefty costs that could hinder a company from moving forward in its business endeavors.
In December 2016, the OCC initially issued a publication, entitled “Exploring Special Purpose National Bank Charters for fintech Companies,” setting out the agency’s thoughts on the fintech charter (a special-purpose national bank charter (SPNB). In it, the OCC proposed how the charter would operate and invited comment from the industry and the public. Although comments came in both for and against this proposal, the general overall recommendation from the public seemed to be that the OCC needed to establish clear supervisory standards. Then, in March 2017, the OCC issued the draft of a licensing manual to address the chartering of SPNB’s, which identified some of the issues that were particularly important for granting fintech charters. One key point was the applicant’s business plan and compliance policies.
Since its March 2017 publication on fintech charters, the OCC has faced many state challenges. In April of 2017, the Conference of State Bank Commissioners (CSBS) filed suit to enjoin the OCC from issuing SPNB charters. The CSBS alleged that Congress granted the OCC the power to charter banks, which must engage in the “three core” functions of banking – lending money, cashing checks and accepting deposits. And unless Congress carves out a special category of bank that does not need to engage in deposit taking (i.e., credit card banks, non-depository trust companies, etc.), any chartered bank must engage in the full range of core banking. The OCC responded stating that Congress did not define what constitutes the “business of banking” and that the phrase was open to interpretation. The definition of what banking means historically has largely been left for the OCC to decide.
Shortly thereafter, in May 2017, the New York Department of Financial Services (NYDFS) also filed suit, characterizing the OCC proposal as “reckless folly” that “will severely undermine New York’s ability to protect its financial markets and consumers,” and “lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State.” In addition, the NYDFS stated that the OCC proposal would put “New York financial consumers – and often the most vulnerable ones – at great risk of exploitation by federally chartered entities improperly insulated from New York law.”
Although the OCC has successfully advanced what is considered the permissible activities of national banks, there was thought that the lawsuit by the CSBS would hamper the OCC’s readiness to accept fintech charters. As we now see this week, that is certainly not the case. In December 2017, the lawsuit brought by the NYDFS was dismissed due to lack of ripeness. Without a final decision by the OCC to grant fintech charters, there was no basis for a claim. Now that the OCC has issued its decision, we can expect to see lawsuits resurface.
At the current time, the OCC is only accepting applications from non-depository firms. The OCC’s expectations for fintech applications are high and require businesses to develop rigorous business and contingency plans, including “a commitment to financial inclusion” that would “provid[e] or support fair access to financial treatment of customers.” It will not necessarily be an easy undertaking for a young business to apply for a fintech charter but this decision could open many doors. The uniformity and clarity of regulations this decision creates could allow for faster growth for many businesses, thereby driving innovation and further encouraging competition. Joseph Otting, Comptroller of the Currency, stated that this decision “provides consumers greater choice, can promote financial inclusion, and creates a more level playing ground for financial services competition.” Applying for multiple state licenses had been a costly endeavor for any company, and a special purpose national bank charter would greatly reduce these costs, allowing for more fintech companies to materialize. Regulation by one overarching entity establishes uniformity in the law and will also drive costs down as a new fintech company will only have to comply with one regulator rather than, potentially, 50 different regulators. This will undoubtedly lead to the emergence of more fintech companies, driving competition up, which is ultimately beneficial to consumers. For many industry groups, this is a move in the right direction.
In similar news, the Consumer Financial Protection Bureau (CFPB) announced on July 18, 2018, that Paul Watkins will lead the new Office of Innovation. The purpose of this new department “will focus on creating policies to facilitate innovation, engaging with entrepreneurs and regulators, and reviewing outdated or unnecessary regulations.” Please follow the link to read more on how regulators are encouraging innovation.