On Friday December 2nd, the Officer of the Comptroller of the Currency (OCC) announced that it would consider granting financial technology (fintech) firms special purpose national bank charters. The OCC’s proposal constitutes a major development for fintech companies and the financial services industry more generally. This move builds on recent actions taken by the OCC in an attempt to promote financial innovation, including releasing a white paper regarding responsible innovation in the financial industry in March, and announcing the creation of an Office of Innovation in October.
Under the OCC’s proposed framework, fintech companies may apply for a special purpose national bank charter—the same type of charter that the OCC has granted primarily to trust banks and credit card banks. In a release summarizing the proposal, the OCC claims that the proposed system will improve safety and soundness of fintech institutions, promote consistency in the application of laws and regulations, ensure fair treatment of customers, and strengthen the federal banking system. Comptroller of the Currency Thomas J. Curry also explained that the banking system will be healthier if fintech companies “enter the system through a clearly marked front gate, rather than through some back door.”
Under the OCC proposal, fintech companies would be treated similarly to national banks from a regulatory perspective. Non-bank fintech companies could seek a single banking license from a single national regulator, as opposed to numerous licenses across multiple states. Because the OCC’s regulations would generally preempt state laws, fintech companies would be able to follow a single, consistent regulatory framework, as opposed to a patchwork of regulations across 50 states. However, the OCC noted that fintech firms that are granted a special purpose charter would still be subject to the same state laws as national banks, including state unfair and deceptive acts and practices statutes, as well as state anti-discrimination, fair lending, and debt collection laws. It is also worth noting that firms could still seek licenses or charters at the state level, but a unified federal approach is a welcome option.
Like national banks, fintech firms that are granted a special purpose charter would be under the jurisdiction of the OCC and subject to the agency’s regulatory scrutiny. The OCC has indicated that it will hold these firms to rigorous standards on issues concerning safety and soundness, capital requirements, the Bank Secrecy Act and anti-money laundering, a formal plan for business failure, fair access to services, financial inclusion and consumer protection. And even where a particular statute or regulation does not technically apply to a fintech firm, the OCC may still seek to further the goals of that law by imposing conditions on the approval of a special purpose charter.
The OCC also previewed the licensing process that fintech companies could expect when applying for a special purpose charter. Fintech applicants would be required to submit a robust and detailed business plan to the OCC. The agency would also carefully evaluate the institution’s governance structure, capital, liquidity, compliance risk management, financial inclusion, and business exit strategies. The OCC’s standard charter application process would apply. As is the case with national banks applying for a charter, the OCC encouraged fintech firms to arrange a meeting with the OCC prior to filing an application to discuss these and other issues.
The OCC’s proposal was generally cheered by fintech companies, who had been urging an update to regulations to allow for greater innovation in the fintech industry. Some had argued that the existing U.S. regulatory model had fallen behind the regulatory regimes of other nations and was hurting innovation. Many believe that allowing fintech companies to follow one set of regulations and answer to one regulator will reduce legal complexity, allow fintech companies to more easily operate nationwide, and spur competition in the financial industry in such areas as mobile payments and digital currency. Because of the nature of cyber and digital currency networks, a federal charter makes sense for such companies, as they will be able to operate globally from day one. The proposed framework may also reduce the need for fintech companies to partner with banks in order to offer their services.
Some state regulators and some consumer groups opposed the framework, arguing that states are the most effective regulators of non-bank financial services companies and best protectors of consumers. However, the New York Department of Financial Services’ (NYDFS) BitLicense requirements, for example, adopted last year and applicable to certain digital currency businesses, have not been widely embraced. NYDFS wanted to put New York State in the position to become a global hub for fintech innovations like bitcoin and blockchain when it adopted its pioneering digital currency rules last year, but the types of start-up companies the state was trying to entice to New York have criticized the BitLicense rules for being overly costly and burdensome. Since its adoption, the NYDFS has issued just two BitLicenses, with at least another 15 BitLicense applications still pending, four others withdrawn and four denied, according to a NYDFS spokesperson. Lengthy approvals, coupled with the need for multiple state licenses, each with different requirements, have left many hoping for a viable federal charter option such as that now proposed by the OCC.
The OCC’s proposal is open for public comment until January 15, 2017.