In a speech given Friday, December 2, 2016, the Comptroller of the Currency Thomas J. Curry announced that Office of the Comptroller of the Currency (“OCC”) will move forward with plans to implement a special purpose national charter for financial technology (“FinTech”) companies. The OCC simultaneously issued a white paper outlining its proposal and requesting comments. These actions are the latest developments in an OCC initiative launched in August 2015 to better understand technological innovation occurring in the financial services industry and to develop a legal and regulatory framework supporting responsible innovation while protecting standards of safety and soundness, fair access and fair treatment of customers.
Citing the National Bank Act and Home Owners’ Loan Act,1 the white paper notes that the OCC retains the authority to establish a special purpose charter for entities that limit their purpose to fiduciary activities or that conduct at least one of the three core banking functions: receiving deposits, paying checks (of which the OCC considers issuing debit cards and facilitating electronic payments to be modern equivalents) or lending money. So long as a FinTech company’s business model includes one of these three core banking functions they would be a potential beneficiary of the OCC’s proposal. Echoing comments made by OCC officials over the course of 2016, the white paper cites limited trust banks and credit card banks that have received OCC charters as precedent for such special purpose charters.
While a strict reading of the OCC’s statement of its authority to issue special purpose charters leads to the conclusion that FinTech companies can apply now for one, the white paper requests public comment on a wide range of issues that would need to be resolved before the OCC would be ready to adapt its review and supervisory expectations to the wide variety of business models in the FinTech space.
As described below, the effects that the availability of such a charter will have on markets and business models rests on the OCC’s resolution of the questions it has identified, where many implementation details will be determined. Compounding this work is the shadow of the recent election. The Congress has demonstrated interest in financial technology issues, and this interest is likely to continue to grow and could expand beyond the Congress.
The FinTech Charter: A New Option Within the Dual Banking System
In his remarks, Comptroller Curry clarified the role that the special purpose charter would play in the U.S. dual banking system, noting that the issuance of a national charter option does not create an obligation to obtain one. FinTech companies would merely have a new third choice available to them, meaning their options would be: (1) the proposed special purpose national FinTech charter; (2) a state bank charter (in jurisdictions where they are available); and (3) to remain out of the banking system, perhaps by partnering with or providing services to existing banks and other financial companies. FinTechs that wish to accept deposits must also obtain FDIC insurance (subject to certain rarely implicated exceptions), for which a separate application process to the FDIC would apply,2 as well as additional legal and regulatory requirements.3
As discussed more fully in the next section, the proposed special purpose FinTech charter would not fully displace existing state and federal laws. However, for some FinTech companies, the special purpose charter would provide critically important benefits. Marketplace lenders would be able to avoid costly state-by-state lender and credit service business licensing as well as benefit from the rate exportation regime. Digital currency and alternative payment system innovators would likewise be able to avoid having to obtain state money transmitter business licenses. However, as discussed in the final section, the ability of FinTech companies to reap these potential benefits depends on the way in which the proposal is finally implemented.
The FinTech Charter: The OCC’s Baseline Expectations, (Limited) Preemptive Scope and Application Process
Both the white paper and Comptroller Curry’s remarks respond, directly in the case of the latter, to comments regarding the then-unspecified FinTech charter idea which were submitted to the OCC by various industry, state regulatory and consumer groups as part of an earlier OCC proposed rulemaking.4
Responding to banking industry concerns about unfair competition, the proposal confirms that laws and regulatory requirements applicable to nationally chartered banks would also apply to specially chartered national banks such as chartered FinTech companies, citing risk management compliance and resolution planning obligations as well as legal lending limits and limits on real estate holdings as examples.5 Similarly, chartered FinTechs would be subject to regular examinations and held to the same standards as those applicable to other federally-chartered institutions. However, the proposal is careful to clarify that such standards will be tailored to size, complexity and risks specific to the regulated institution.
In other comments, consumer groups and state commissioners raised concerns about financial inclusion and preemption of state law (in particular, preemption of state consumer protection laws). In response, the white paper repeatedly discusses the ability of the OCC to impose requirements as part of the chartering process to ensure that obligations broadly consistent with those contained in the Community Reinvestment Act (“CRA”) would be applied to chartered FinTechs.6 The proposal also confirms that the special purpose national charter would not preempt many state laws and supervisory powers, referring explicitly to state laws on anti-discrimination, fair lending, debt collection, taxation, zoning, criminal laws, foreclosure, and torts, nor would it displace state and federal consumer protection laws prohibiting unfair, abusive or deceptive treatment of consumers, which would apply to chartered FinTechs to the same extent that they do to existing national banks.7
The proposal also confirms that the OCC will require chartered FinTechs to maintain minimum and ongoing capital, as well as minimum and ongoing liquidity (both operating and contingent obligations), at levels commensurate with the risk and complexity of the activities contemplated by the entity’s business plan (including on- and off-balance sheet activities).
Finally, the proposal reveals that the OCC would apply its standard process to charter applications, including the pre-filing meeting and staged review and decision process. The OCC would also impose standard charter requirements, citing those applicable to establishment of appropriate policies and procedures as well as adoption of an internal audit system appropriate to the size, nature, and scope of the chartered FinTech’s activities.
The Charter and FinTech: The Right Fit?
As with all financial regulatory developments, the cost-benefit tradeoff of any new proposal lies in how the details pertain to a company’s business model. The white paper requests comment on thirteen specific questions, which we reproduce below for convenience. Some points merit particular consideration by FinTech company managers and legal counsel, who may be well served by responding to the OCC’s request for comments to provide the OCC with further insight.
A number of OCC questions highlight the ways in which the OCC’s statutory and regulatory approach likely do not sufficiently take into account the wide variety of business models comprising the FinTech space. But merely developing a new “one-size-fits-all” approach to special purpose charters would equally fail to respond to FinTech company needs. We highlight the following:
- The white paper discusses how national trust banks, which utilize off-balance models, are subject to higher minimum capital requirements than other types of banks. Applying similar rules to FinTech companies that have few on-balance sheet assets could act as a barrier to their utilization of the FinTech charter.
- Additionally, the OCC’s recent proposed rulemaking regarding receiverships for uninsured national banks makes clear that the OCC expects FinTech companies that do not obtain FDIC insurance to be able to be wound up without governmental insurance or extraordinary assistance. This expectation is likely to inform its view of the appropriate level of capitalization and liquidity requirements for FinTechs.
- The OCC contains little detail regarding how it would adapt CRA-like “financial inclusion” requirements to the business models of FinTech companies, and specifically seeks comment on what such concepts would mean for companies who only maintain a virtual presence, or whose target community may be geographically dispersed. Similarly, the OCC requests comment on how CRA-like “financial inclusion” requirements can be applied to companies that do not engage in lending, or that do not offer services to the public. FinTechs that have developed innovative methods for ensuring financial inclusion should share their perspectives with the OCC.
- Bank-style supervision and examination is timely and expensive, and while the OCC’s commitment to tailoring its requirements to an institution’s size, complexity and risks is laudable, such tailoring will only work if the OCC has an adequate understanding of what is appropriate given a certain size, complexity or risk level for a given business model. FinTechs will need to share their experiences in internal compliance and risk management in order for these standards to be “right-sized.” This dialogue will also assist the OCC in determining what additional expertise it needs to obtain in order to be fully responsive to the particulars of the FinTech space.
- The proposal discusses regulatory coordination with the Federal Reserve (noting that all national banks are required to be members, and that most special purpose national banks would be members, of the Federal Reserve System), the FDIC and the Consumer Financial Protection Bureau (“CFPB”). Coordination with the CFPB will be particularly important (especially for lending companies), as the CFPB has led regulatory efforts impacting non-bank technology companies and other lenders that have competed and will compete for many of the same customers as chartered FinTechs and traditional banks. FinTechs should be proactive in enabling productive, consumer-friendly coordination among the appropriate agencies, including sharing positive experiences from working with state agencies and commissioners.
- Similarly, FinTech companies that may have a foreign footprint (or anticipate having one) should consider engaging the OCC to explain the nuances of their respectively multinational footprints and how cross-border regulatory coordination might be necessary to prevent duplication or potential chilling of innovation.
The key point for market participants in thinking about the below questions is how will the OCC’s decisions on each question specifically impact a market participant’s business model.
- For example, in the case of lending firms, how will the OCC distinguish capital and liquidity requirements for those firms which use a “balance sheet” model from those who use an “originate to distribute” model?
- Or, for payments companies, how will the OCC view capital and liquidity levels for banks whose operational risks might be more consequential than balance sheet risks?
- These specific examples lead to an important macro-level inquiry: will the OCC offer specific guidelines for all FinTechs addressing the below questions or will the OCC elect to examine each business model on a case-by-case basis, with relatively minimal overarching guidance? The answer will depend significantly on the comments the OCC receives during the comment period.
According to OCC staff, Comptroller Curry has requested that they prepare a policy on FinTech chartering, which will be informed by the comment process initiated by Friday’s proposal, though they do not plan to release that policy as a formal regulation at this time. It is incumbent upon firms and the broader public to utilize this opportunity to engage the OCC to ensure that the eventual policy enables responsible innovation.
Comments are due January 15, 2017 and may be submitted to email@example.com.
The OCC's Thirteen Questions (see pages 16-17)8