The Office of the Comptroller of the Currency (OCC) announced plans to establish an office dedicated to responsible innovation, accompanied by a formal framework to "improve the agency's ability to identify, understand, and respond to financial innovation affecting the federal banking system."
Traditional banking business models have been challenged by technological advances and evolving consumer preferences, which are reshaping the financial services industry at an accelerated pace, the agency explained. To support the ability of national banks and federal savings associations to fulfill their role of providing financial services to consumers, businesses, and their communities, the OCC elected to embrace "responsible innovation."
Defining the term as "[t]he use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner consistent with sound risk management and aligned with the bank's overall business strategy," the OCC began the process with a working group, meetings with industry stakeholders and other regulators, as well as focus groups. In March, the agency published a white paper, requesting comments on its proposed plans.
The decision was made to develop a framework to support responsible innovation and create an Office of Innovation to implement the framework. The Office will provide both internal and external visibility; serve as a central point of contact and facilitate responses to inquiries and requests; conduct outreach and provide technical assistance; enhance awareness, culture and education; monitor the evolving financial services landscape; and collaborate with domestic and international regulators.
While commenters generally favored such an Office, they objected to an entity that would result in "another regulatory hurdle or silo," the OCC noted. The Office itself will be located at OCC headquarters in Washington, D.C., headed by a Chief Innovation Officer. Other members of the staff will include an Innovation Technician and a "small number" of Innovation fellows, some located in financial technology hubs such as New York City and San Francisco.
The framework to be effectuated by the staff members contained five areas, the OCC said: Outreach and Technical Assistance; Awareness and Training; Coordination and Facilitation; Research; and Interagency Collaboration.
For "a robust program of outreach and technical assistance to maintain agency awareness of innovation trends and activities and support banks and fintechs in their pursuit of responsible innovation affecting the federal banking system," the Office will engage in an ongoing dialogue with all stakeholders to stay abreast of current trends and developments.
Dialogue will not be limited to banks, the agency noted, with outreach to nonbanks and third parties as well, including technical assistance such as creating resource material on regulatory principles, processes, and expectations and designing "rules of the road" material for nonbanks. "Office hours" and other meetings will also be encouraged to provide both banks and fintechs with meaningful information about how to "effectively and responsibly" engage in innovation, the OCC added.
The second element of the framework will find the agency conducting awareness and training activities. An Innovation Networking Group, an internal web page with information for OCC staff, and new materials that describe the fundamentals of emerging products, services, processes, and technology will all be included as part of an effort to broaden and increase OCC expertise in areas related to innovation. The agency will also look to recruit individuals with a broader variety of skills in areas such as engineering, advanced information technology, systems development, cybersecurity, statistics, and mathematical modeling.
To encourage coordination and facilitation, the OCC pledged to improve the timeliness and transparency of its decision making, noting that failures in these areas were common criticisms found in comments. Furthermore, the Office will establish specific response and disposition expectations for innovation inquiries and requests, including communication standards and plans to use a standard workflow to manage inquiries and requests for new products, processes, and services.
In addition, the Office will develop and implement an optional program for OCC participation in bank-run pilots, a move praised by commenters. Further development to create this "sandbox" or "safe space" for experimentation will follow, the agency said.
The Office will also stay attuned to changes in the industry by conducting industry innovation research and promoting interagency collaboration, leveraging existing channels (a relationship with the Consumer Financial Protection Bureau, for example).
To read the OCC's Innovation Framework recommendations and decisions, click here.
Why it matters
The agency expects to have the new Office up and running in the first quarter of 2017. The real test of the efficacy of the Office will depend on its ability to be innovative and flexible in responding to new proposals and business models. "The OCC supports responsible innovation that enhances the safety and soundness of the federal banking system, treats customers fairly, and promotes financial inclusion," OCC Comptroller Thomas J. Curry said in a statement. "By establishing an Office of Innovation, we are ensuring that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and the supervision that supports it." The agency also noted that consideration of granting a special purpose national bank charter to nonbank financial technology companies continues, with no determination yet, as well as a plan to publish a paper later in 2016 "discussing the issues associated with establishing a special purpose charter and seeking comment on the topic."