NY regulator criticizes fintech bank license plan

New York regulators have criticized plans to license certain technology firms offering banking products and services, pointing to a potential turf war between authorities and highlighting challenges to the proposal after industry groups also warned of difficulties.

Comptroller of the Currency Thomas Curry on December 2 said the Office of the Comptroller of the Currency (OCC) would consider applications from financial technology (fintech) firms to become special purpose national banks (SPNBs). The OCC at the time published a paper discussing the issues and conditions the agency will consider in granting charters to such organizations, and asked for feedback.

In a speech announcing the plan, Curry said his agency was considering special purpose national charters for fintech companies for a variety of reasons. ‘It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers and help families and businesses take more control of their financial matters,’ he said.

He also argued that considering fintech charter applications would give businesses a choice without creating an obligation to seek a charter. Companies that do so will be evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection and strong capital and liquidity.


‘USURP STATE LAWS’
The proposal has met with opposition, however. ‘The OCC should not use technological advances as an excuse to attempt to usurp state laws that already regulate fintech activities where they intersect with banking and lending, whether depository or non-depository,’ says New York Department of Financial Services (NY DFS) superintendent Maria Vullo in a statement issued last month as she filed a comment letter with the OCC.

‘A one-size-fits-all federal charter will not work to create a level playing field among all financial services companies, or to alleviate risks. On the contrary, the proposal increases risk, creates an opportunity for regulatory arbitrage and attacks states sovereignty.'

In the letter, NY DFS argues that, unlike state regulators, the OCC has never regulated non-bank financial institutions. The department licenses and supervises more than 2,000 banking and non-banking institutions, many of which use technology as a key part of their business to lend or transfer money, including money transmitters, licensed lenders, sales finance companies, premium finance agencies, mortgage banks and bankers and virtual currency exchanges, the department says.

Indeed, the National Bank Act does not grant the OCC authority to create the proposed new charter, Vullo says. The proposal ‘threatens to create an entirely new federal regulatory program, creating serious regulatory uncertainty that threatens to invade state authority’ and encourage those who may try to evade state consumer protection laws.

The proposed licensing would encourage so-called ‘too-big-to-fail’ institutions, allowing a small number of technology-savvy firms to dominate different types of financial services because they are able to get a national charter, Vullo argues.

‘A national charter would result in increased business lines and personnel crowded under one roof, rather than the development of mono or dual-line businesses that fill specific consumer needs and provide jobs in our communities,’ she writes. ‘Bigger means management will seek to sweep any violation under the rug as not material. Bigger may mean more pressure to chase profits at the expense of safety and soundness.’

The creation of a national charter is likely to stifle rather than encourage innovation because it would be an avenue for larger, more dominant firms to control the development of technology solutions in the financial services industry, thereby harming existing banks and small businesses seeking to serve local communities, NY DFS argues.

‘Currently, small business can enter the fintech field and explore different technologies,’ Vullo explains. ‘The ability to start and license a business through a state licensing regime is the appropriate way to foster the development of technological enhancements and encourage small businesses.’

If fintechs are able to secure the new license they may be able to engage in regulatory arbitrage and seek to avoid key state consumer protection laws – such as those banning usury – on the basis of being technology companies, NY DFS argues. The new licenses also present unique risks that demand close and expert supervision ‘to make sure these entities are not used to finance terrorism or perpetrate fraudulent schemes targeting the elderly and other vulnerable victims,’ Vullo says.

Her department has officials specializing in licensing, supervising and examining non-depository institutions who are also experienced in looking at the unique compliance challenges these firms present, she says.

Similarly, NY DFS has for years had a team of examiners with extensive training and expertise qualifying them to examine depository and non-depository for cyber-security, Vullo adds. The department recently proposed what it describes as a first-in-the-nation cyber-security regulation that will set minimum standards for financial services firms.

Vullo also called on state regulators, legislators and other policymakers to oppose the OCC’s proposal.


INDUSTRY LETTER
In a separate comment letter, the Clearing House Association, Independent Community Bankers of America and Securities Industry and Financial Markets Association write: ‘[A]s is evident in the white paper itself, there are multiple, fundamental policy and other issues that need to be considered and resolved before SPNB charters can be issued to fintech companies’ (CorporateSecretary.com, 2/1). 

Regulatory co-ordination is necessary to ensure that well-established principles of bank regulatory policy, such as separation of banking and commerce and consolidated supervision, are not undermined as fintech companies are incorporated into the supervised financial services industry, they argue.

Among other things, they say the OCC must establish a ‘fair and level competitive playing field to address the concern that fintech SPNBs would be able to offer services and products in direct competition with full-service banks, but subject to a more limited and less burdensome regulatory regime.’