So you are an online lender, a digital currency company or a payments company, and you want to conduct business throughout the United States. How do you get licensed? Easy. You establish a corporate entity, register with FinCEN, request certificates of authority from each state (which may include obtaining separate business licenses, registration with local taxation or labor boards), then commence the individual state licensing application process, the requirements and standards of which are different in each state, some of which, depending on the license, may require application submission through the NMLS on line system, while some other states have their own on line systems, or alternatively paper submission. Simultaneously there is the securing and posting of a surety bond, the face amounts which vary widely from state to state. This is a process that can take not months but years. Then, once approved, there is the state by state annual renewal, for a fee, of the corporate existence and license, the annual, semi-annual, quarterly, and in some cases monthly state financial and other reporting, including updates on authorized agents, and the benefit, at a cost, of examination by each state.
Actually, not so easy.
Enter the Office of the Comptroller of the Currency (OCC) to the rescue. On Friday, December 2, 2016, at Georgetown University Law School, Comptroller Thomas Curry announced the creation of a Special Purpose National Bank Charter (Special Purpose Charter) for FinTech Companies. Like other national bank charters, companies operating under this Special Purpose Charter will be granted the same preemption over state laws that national banks possess, including operating in every state without the requirements of engaging in the local state application and license maintenance process. To receive such a Special Purpose Charter, an applicant must conduct one of three core banking functions: receiving deposits; paying checks (or the modern equivalent); or lending money.
Like national banks, Special Purpose Charter national banks are organized under, and governed by, the National Bank Act. This includes corporate governance structure (classes of shares, voting rights, number and term of directors), and permissible activities which are limited to only those activities in which a national bank may engage. Notwithstanding, national banks may engage in a broad array of financial services powers. In general, a Special Purpose Charter national bank would be subject to the same laws, regulations, examination, regulatory reporting requirements and ongoing supervision as full service national banks. This would also include, among other things, adherence to such laws as the Bank Secrecy Act, other anti-money laundering laws, OFAC sanctions and prohibitions from unfair or deceptive acts and practices under the Federal Trade Commission Act and section 1036 of the Dodd-Frank Act.
Depending on the types of activities engaged in by a FinTech company, certain laws and regulations might not apply. For example, if the FinTech company did not offer deposit taking and therefore did not carry FDIC insurance, certain provisions of the Federal Deposit Insurance Act would not apply, including provisions regarding receivership. While holders of a Special Purpose Charter would be required to be members of the Federal Reserve system, the Bank Holding Company Act would apply only if the company meets the definition of a "Bank," including that it both accepts demand deposits and makes commercial loans. While we must wait for a final view on this point from the OCC, the discussions at Georgetown Law, as well as the simultaneously published OCC paper, intimate that absent meeting such definition of a "Bank," FinTech Special Purpose Charters may be viewed much like an Industrial Loan Company (ILC). As with an ILC, a company with a FinTech Special Purpose Charter could be owned by domestic or foreign companies without its activities being limited under the Bank Holding Company Act. So ownership of a company with a FinTech Special Purchase Charter could be open to any for-profit, nonprofit, industrial or service company - which is currently not the case with respect to ownership of an FDIC-insured bank.
The application process for a FinTech Special Purpose Charter will follow the model for a de novo national bank charter. It will entail a pre-filing meeting with the OCC, the actual application filing, the review period and the OCC multi-stepped decisioning phase. A successful application will require a robust, well-developed business plan that details the company's activities, governance structure and compliance risk management. The applicant will also need to detail its ability to raise and maintain capital and liquidity levels commensurate with the risk and complexity of its proposed activities. While a successful applicant will be held to the same standards of safety and soundness, fair access, and fair treatment of customers that all federally chartered institutions must meet, it will also replace a regulatory structure of 51 regulators for one (or possibly two depending upon the scope of activities and final pronouncement on Bank Holding Company Act impact).
The OCC paper issued on December 2, 2016, set forth a series of 13 broad questions for public comment on the implementation of certain details surrounding the issuance of such Special Purpose Charters. Comments are due by January 15, 2017. While the OCC may provide some additional guidance in connection with the application for and issuance of Special Purpose Charters for FinTech companies following the expiration of the comment period, the Comptroller in his remarks at Georgetown University indicated the OCC had no immediate plans to issue new regulations related to such Special Purpose Charters. Accordingly, any concerns regarding a Special Purpose Charter issuance are expected to be managed through the chartering process itself.
The OCC pronouncement on December 2, 2016, is a major change from the way FinTech companies can currently operate in the United States. While the obtaining of such a Special Purpose Charter is not required for FinTech companies to operate in the United States, any FinTech company currently operating or considering operating in the United States should carefully consider whether such a Special Purpose Charter would ease its regulatory burden nationwide. FinTech companies already operating under bank charters in other countries will now have the opportunity to better expand their reach in the United States as well.