President-elect Donald Trump plans to shake up Washington. The full scope of his proposed changes remains to be seen, but they will certainly affect the financial services industry, especially financial technology.
This emerging sector includes, but is not limited to, online marketplace lenders such as Lending Club, bitcoin and blockchain technology, also known as distributed ledger technology (DLT), money management applications such as Mint, money transmitters such as Venmo, and digital wallets.
Because of their increased availability and utility, regulators and legislatures at the state and federal level have taken notice of financial technology products, services and companies. Trump’s campaign promise to severely cut back regulation, as well as congressional Republicans’ general aversion to the increased regulatory presence in financial services, means significant changes are likely forthcoming.
Most financial technology products and services do not fall squarely within the regulatory purview of any specific federal agency. At the federal level, there are many agencies jumping into the fray, including the Department of the Treasury, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the Securities and Exchange Commission (SEC).
Department of the Treasury
In 2015, Treasury released a request for information regarding online marketplace lending. In May, the department published a white paperoutlining the responses it received and made certain recommendations for best practices in order to encourage growth and expanded access to credit through online marketplace lending.
Office of the Comptroller of the Currency
The OCC has been among the most proactive federal agency to address regulation of the growing financial technology industry. In October, the OCC announced the creation of an Office of Innovation for greater outreach to the industry. This month, the OCC announced it will provide special purpose charters to financial technology companies engaged in the “business of banking” and requested comment on several aspects of the proposed charter.
The industry is invited to comment on initial and ongoing requirements for chartered financial technology companies, including capital, liquidity and “financial inclusion,” which are similar to Community Reinvestment Act (CRA) requirements.
The most potentially burdensome requirements are those related to financial inclusion. The CRA is only applicable to institutions insured by the Federal Deposit Insurance Corporation, so most OCC-chartered financial technology companies would not be covered. This places partnerships between banks and online marketplace lenders, which are popular with banks to supplement their CRA portfolio, at risk.
Consumer Financial Protection Bureau
Project Catalyst is the CFPB’s effort to encourage innovation in a way that benefits consumers and businesses. Recently, the CFPB announced a policy that will provide financial technology companies with the opportunity to have the CFPB review their products and services, as well as their compliance program. After review, the CFPB can provide a letter indicating the agency’s belief that the company is compliant with the relevant laws and regulations. It also states that the CFPB will not pursue any enforcement actions if the company does not make material changes.
While the policy is considered friendly to the industry, the recently released prepaid card rule is not. Its broad definition of “prepaid cards” captures digital wallets that can store money and may deter startups in that space due to the high compliance burden. It is also worth noting that congressional Republicans and President-elect Trump do not support the CFPB. Both its mandate and its existence are likely targets early in Trump’s term. The Financial CHOICE Act, introduced by Rep. Jeb Hensarling (R-Texas) earlier this year, would completely redefine the CFPB and its mandate.
Securities and Exchange Commission
SEC Commissioner Michael Piwowar is particularly interested in exploring the SEC’s role in the financial technology industry. He recently championed the SEC’s Fintech Forum, which was held in November. The SEC’s mandate includes protecting consumers in the markets, and financial technology is providing new avenues for corporations and consumers to interact with the market.
The SEC’s crowdfunding rules allow for equity crowdfunding through the internet. Marketplace lenders are securitizing debt, which implicates the SEC. So-called robo-advisers are increasingly common and projected to have $2.2 trillion under management by 2020. Finally, DLT has the potential to revolutionize clearing and settlement systems, as well as recordkeeping systems more generally.
The SEC is paying attention to the increased use and acceptance of DLT throughout world financial markets, including its planned use in both Australia’s largest stock exchange and Switzerland’s largest market infrastructure provider. Further, the Cook County Recorder’s Office in Illinois is using DLT to transfer and track property titles and other public records.
The most comprehensive current federal legislative proposal addressing this industry is the Financial Services Innovation Act, introduced by Rep. Patrick McHenry in 2016. The bill proposes to create a Financial Services Innovation Office (FSIO) within all relevant administrative agencies and Treasury, much like the OCC’s Office of Innovation.
Recognizing that financial technology may not touch each agency, the bill provides that if an agency FSIO has not received a petition in five years, it will be eliminated. The main point of both the bill is to encourage those with interesting and innovative ideas to come to the regulators to try to ensure a compliant product.
A financial technology provider works with its chosen regulator to create a compliant and consumer-friendly product and can enter into an “enforceable compliance agreement” wherein the agency waives certain of its regulatory requirements and prohibits other federal agencies and states from commencing enforcement actions against the protected financial technology provider.
This bill is still in its infancy, legislatively speaking, and will likely be heavily modified, especially the enforceable compliance agreement’s moratorium on enforcement actions. McHenry has worked to include financial technology proposals in House Majority Leader Kevin McCarthy’s (R-Calif.) Innovation Initiative, which seeks to increase innovation in the private sector as well as bring more technology and innovation to government. With a Republican president and Republican Congress, these ideas may gain traction.
As discussed above, Hensarling’s Financial CHOICE Act would also affect financial technology. While it is unlikely to gain the eight Democratic votes needed to pass in the Senate, it will provide a blueprint for financial reform and elements can be pulled out and passed through reconciliation. The bill’s CFPB-related provisions are particularly noteworthy.
Donald Trump administration
The incoming administration has not actively addressed financial technology, but Trump has met with and encouraged leading technology companies. The financial industry, especially small and mid-sized banks, is poised to see potentially drastic changes in regulatory compliance requirements and the financial technology sector may finally receive clarity on their compliance obligations.
The OCC’s new charter, a version of the Financial Services Innovation Act, and a likely extreme reimagining of the CFPB may allow financial technology companies to bring products and services to market more quickly. These should provide them the confidence to know their compliance programs are appropriate and robust enough to withstand regulatory scrutiny.