On December 2, 2016, Comptroller of the Currency Thomas J. Curry announced formally that the Office of the Comptroller of the Currency (OCC) will move forward with chartering financial technology (FinTech) companies that offer bank products and services as special purpose national banks. The announcement was accompanied by the OCC's release of a guidance paper (Paper) entitled "Exploring Special Purpose National Bank Charters for Fintech Companies" that provided both initial guidance on the special purpose chartering process and posed a set of thirteen questions for public comment.
The OCC will accept comments on its Paper until January 15, 2017. OCC staff will incorporate comments received into a formal agency policy used to evaluate any application by a FinTech company for a special purpose national bank charter (FinTech Charter).
As noted by Comptroller Curry in his announcement, the number of FinTech companies in the United States and United Kingdom has grown to more than 4,000, and investment in the FinTech sector over the past five years has grown from US$1.8 billion to US$24.0 billion worldwide. In order to maintain a national banking system that is responsive to this FinTech growth, encourage responsible innovation, and prevent obsolescence of the national bank regulatory framework, the OCC recently established an Office of Innovation. Despite the opposition of some, such as the New York State Department of Financial Service's Superintendent,
the OCC is also moving forward with chartering FinTech companies as special purpose national banks that offer bank products and meet the OCC's chartering criteria. Earlier this year the OCC released its notice of proposed rulemaking addressing the conduct of receiverships for national banks that are not insured by the Federal Deposit Insurance Corporation (FDIC) and for which the FDIC would not be appointed as receiver.That proposed rule, when finalized, further establishes the essential resolution pillar necessary for the OCC to operationalize its FinTech chartering and supervising authority. Following receipt of public comments to the Paper, the OCC will finalize a policy concerning the FinTech Chartering process.
The remainder of this Advisory details the OCC's chartering authority, key features of a FinTech Charter, and baseline OCC supervisory expectations, and offers initial considerations to interested parties for moving forward in light of the announcement.
FinTech Charter Overview
While the OCC will move forward in granting FinTech charters, it is not yet clear what kind of company would be considered a FinTech company. The OCC recognized in its Paper that FinTech companies vary widely in their business models and product offerings, but notes a few types of illustrative examples: marketplace lenders, payment services providers, digital currency and distributed ledger technology companies, and financial planning and wealth management companies. Notably, the Paper clarifies that "there is no legal limitation on the type of 'special purpose' for which a national bank charter may be granted, so long as the entity engages in fiduciary activities or activities that include receiving deposits, paying checks, or lending money." Clarity is needed from the OCC as to what types of technology-based financial service providers are eligible for a FinTech Charter or, in fact, whether a technology feature is a necessary requirement for the grant of a special purpose charter from a supervisory, as opposed to merely legal, perspective.
The Proposal highlights several features of a national bank charter and that would be applicable to a FinTech Charter, and are summarized briefly below.
Corporate Structure. A national bank charter is a federal form of corporation organization and is issued pursuant to the National Bank Act (NBA). The NBA provides for a national bank's organization and structure (e.g., classes of shares, voting rights, number of directors, and term of office).
Bank-Permissible Activities. A national bank may engage in activities that are provided for in statutes, the OCC's regulations, and in legal opinions and corporate decisions that the OCC regularly publishes. A special purpose national bank may engage only in activities that are permissible for a national bank; however, its activities may be further restricted through its articles of association or through OCC-imposed conditions for approving the charter. Once such limitation might be to restrict activities that would otherwise render a FinTech company's holding company to be a bank holding company pursuant to the Bank Holding Company Act (BHCA).
Rules and Standards. In general, a special purpose national bank is subject to the same laws, regulations, examinations, reporting requirements, and ongoing supervision as other national banks. State law also applies to a special purpose national bank in the same way and to the same extent as it applies to a full-service national bank. Some statutes, such as the Community Reinvestment Act, apply only to a national bank that is FDIC-insured. The Paper and Comptroller Curry in his announcement emphasized though that the OCC may impose requirements on a special purpose bank as a condition for granting a charter that are similar to certain statutory requirements that might not otherwise apply by statute but that might be appropriated based on the risks and business model of the institution.
Regulatory Cooperation. The OCC would serve as the primary prudential regulator and supervisor for FinTech companies granted FinTech Charters. Depending on a FinTech company's corporate structure, other regulators may be relevant, and the OCC would coordinate with relevant regulatory bodies in the FinTech Chartering process. Of particular note is the Federal Reserve given that, with rare exception, all national banks are required to be members of the Federal Reserve System. Of further significance is the BHCA which the Federal Reserve Board administers. The BHCA establishes a comprehensive supervisory regime for companies that control a "bank" as that term is defined in the BHCA. A national bank is a "bank" for purposes of the BHCA if (1) it is either (a) an FDIC-insured bank or (b) a bank that both accepts demand deposits and engages in the business of making commercial loans and (2) it does not qualify for any of the exceptions from the definition of "bank" in the BHCA.
The Proposal also highlights several baseline OCC supervisory expectations for holders of a FinTech Charter, which are summarized briefly below. These expectations may be further augmented, however, as the OCC reviews comments to the Paper and incorporates them into a pending FinTech Charter policy.
Business Plan. The OCC expects a detailed business plan from each FinTech Charter applicant that summarizes how the proposed bank will organize its resources to meet its goals and objectives and how it will measure progress over at least a three-year horizon. Importantly, a robust business plan should be in place as deviations from such plans may require prior approval by the OCC and may hinder a FinTech company's ability to deviate dynamically away from its stated business plan.
Corporate Governance. The OCC expects the governance structure for any proposed special purpose national bank to be commensurate with the risk and complexity of its proposed products, services, and activities. Active involvement by members of the company's board of directors is essential.
Capital. Maintenance of minimum levels of regulatory capital is a hallmark feature of banks and the Paper demonstrates that capital will be particularly important feature for FinTech companies seeking a FinTech Charter given their potential heightened risk profiles and off-balance sheet risks. To account for these deviations from commercial national bank risk profiles, the OCC expects FinTech Charter applicants to propose a minimum level of capital.
Liquidity. As with capital, minimum and ongoing liquidity (both operating and contingent obligations) for a special purpose national bank needs to be commensurate with the risk and complexity of the proposed activities.
Compliance Risk Management. An applicant seeking a FinTech Charter is expected to demonstrate a culture of compliance that includes a top-down, enterprise-wide commitment to understanding and adhering to applicable laws and regulations and to operating consistently with OCC supervisory guidance. The applicant would need appropriate systems and programs to identify, assess, manage, and monitor the compliance process (e.g., policies and procedures, practices, training, internal controls, and audit), and a commitment to maintain adequate compliance resources.
Financial Inclusion. The OCC's statutory mission includes insuring that national banks treat customers fairly and provide fair access to financial services. For insured depository institutions the OCC partially fulfills that mission through its administration of the CRA. The OCC, for FinTech-Chartered companies, will encourage such companies to provide fair access to financial services and may impose such requirements upon FinTech-Chartered companies. As to FinTech lenders specifically, financial inclusion and community reinvestment will be expected.
Recovery and Resolution Planning. The OCC expects a proposed bank's business plan to include alternative business and recovery strategies to address various best-case and worst-case scenarios. While the objective of these business and recovery strategies is to remain a viable entity, the OCC may also require a FinTech company to have a clear exit strategy.
Although the final details of the OCC's policy surrounding FinTech Charters is still pending receipt and incorporation of public comment on the Paper, FinTech companies interested in pursuing a FinTech Charter would be wise to begin considering how becoming a bank may benefit them when weighted against the costs of operating as a national bank. While it is premature to outline all such considerations at this point, early engagement of stakeholders and, in particular, investors, will be important as bank regulatory and control issues will need to be fully vetted. FinTech firms should also consider their growth strategy and business plans, and whether being a bank whose M&A activities are likely to require regulatory approval is beneficial. Of course, prospective FinTech Charter applicants should also consider how a FinTech Charter augments their licensing and partnership structures and compliance infrastructure given the heightened powers a bank charter would provide, as well as the heightened compliance obligations a bank charter would impose.
Comptroller Curry's announcement that the OCC will move forward with chartering FinTech companies that offer bank products and services as special purpose national banks is a historical development in the banking and financial services sector. For more than a decade, the OCC has been reluctant to charter new non-depository national banks and trust companies that are not subsidiaries of FDIC-insured national banks. While the cost-benefit analysis of such a charter is still to be determined based on the OCC's release of its FinTech Charter policy, it is clear that the FinTech Charter holds great appeal for many industry participants. Becoming a bank is no small endeavor, though, and prospective applicants and stakeholders are encouraged to fully consider how such a FinTech Charter can and will affect them, either as applicants or as counterparties and investors.