On December 2, 2016, the United States’ Office of the Comptroller of the Currency (OCC) announced that it would move forward with considering applications from Fintech companies to become special purpose national banks. The OCC also published a paper discussing the issues and conditions that it will consider in granting special purpose national bank charters (the “OCC Paper”).
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 would be granted the option to apply for a special purpose national bank charter. 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.
Fintech activity in the US is currently subject to a number of state laws, including state money transmission laws, in addition to federal laws. Subject to constitutional limitations, a federal Fintech charter could result in the application of federal rather than state law in some areas, and is therefore seen as a welcome option by some Fintech entities seeking a more streamlined regulatory regime. Similarly in Canada, Fintech activity can be subject to both federal and provincial law, making for, in some cases, a fairly complex regulatory regime.
For its part, the OCC stated in the OCC Paper that it believes it is in the public interest to consider granting special purpose national bank charters to Fintech entities who wish to apply for such, as it would (a) help ensure that Fintech entities are operated in a safe and sound manner, i.e. are held to rigorous standards of safety and soundness, fair access, and fair treatment of customers, (b) promote consistency in the application of law and regulation and ensure that consumers are treated fairly across the United States, and (c) provide a path for Fintech companies to become national banks, which the OCC believes could enhance the banking system’s strength by encouraging Fintech entities to explore new ways to promote fair access and financial inclusion and innovate responsibly.
The OCC acknowledged that Fintech companies’ business models vary widely and that therefore each application should be reviewed individually. However, it also identified fairly strict baseline supervisory expectations for any entity seeking a special purpose national charter:
- A robust and well developed business plan;
- A governance structure appropriate for the risk and complexity of the entity’s proposed products, services, and activities (including staff with the necessary expertise and financial acumen, an appropriate risk management framework, and an active and prominent role for the board of directors);
- Capital and liquidity requirements;
- A strong compliance infrastructure (including with respect to consumer protection and anti-money laundering compliance matters);
- A financial inclusion plan demonstrating how the entity plans to respond to the needs of the community; and
- Recovery and resolution planning addressing how the entity would identify, and respond to, severe stress.
The OCC indicated that it would work with each applicant to develop and tailor supervisory standards to each applicant, based on the applicant’s circumstances including its size, business model, complexity and risk profile.
Comments on the OCC Paper are due January 15, 2017. Further developments in respect of the US national Fintech charter proposal are no doubt worth watching closely, as an example of how regulators around the world continue to grapple with the best way to regulate and promote Fintech activity in their jurisdictions in a manner that accords with their existing regulatory structure.