Following the trend of federal agency interest in fostering (and potentially regulating) innovation in the field of financial technology (Fintech), the Office of the Comptroller of the Currency (OCC) released the white paper "Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective." The white paper is part of an initiative announced by Comptroller Thomas J. Curry in August 2015 to develop a comprehensive framework to improve the OCC's ability to understand innovation in the financial services industry, and to help national banks and federal savings associations "thrive" in the face of increasing competition from Fintech companies.

Kathleen Oldenborg, the OCC's Director of Payments Risk Policy, reiterated the white paper's objectives in remarks at an American Conference Institute conference in Chicago on March 31, 2016, stating that the OCC supports "responsible innovation" and encourages banks to "dip their toes in the water of innovation." She warned, however, that innovation should serve a purpose, such as meeting the evolving needs of the community, and not exist for the sake of innovation.

The white paper recognizes that many innovations in financial services, such as those related to mobile wallets, distributed ledger technology, and marketplace lending, are taking place outside of the banking industry, often in lightly regulated Fintech companies. In order to understand these new technologies, render timely decisions on matters requiring regulatory approval, and issue guidance about the OCC's supervisory expectations, the OCC seeks to develop a framework for evaluating products, services, and processes that encourages responsible innovation. The white paper presents the OCC’s eight guiding principles:

  • Support responsible innovation. The OCC defines responsible innovation as the use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank's overall business strategy.

  • Foster an internal culture receptive to responsible innovation. The OCC seeks to remove barriers to responsible innovation that are ingrained in the agency, such as a low risk tolerance for innovative products and services and a need for employee access to expert resources.

  • Leverage agency experience and expertise. The OCC intends to rely heavily on existing staff in implementing its new framework.

  • Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers. The OCC hopes that financial innovations will broaden access for underserved consumers by delivering more affordable products and services.

  • Further safe and sound operations through effective risk management. The OCC framework will consider how financial institutions identify and address risks resulting from emerging technology, such as cyber risk, risk to customer data through data aggregation and third-party use, and risks arising from partnerships with nonbanks.

  • Encourage banks of all sizes to integrate responsible innovation into their strategic planning. A bank's decision to offer innovative products and services should be consistent with its long-term business plan rather than following the latest fad or industry trend.

  • Promote ongoing dialogue through formal outreach. The OCC will undertake formal outreach to all stakeholders, including banks, nonbank innovators, and consumer groups.

  • Collaborate with other regulators. The OCC will work with other agencies domestically and internationally, including the Consumer Financial Protection Bureau (CFPB), to promote a common understanding and consistent application of laws, regulations, and guidance.

As reported in a recent Pew Center white paper, the legal framework controlling Fintech can be best characterized as a patchwork of laws with gaps (where no law applies); ambiguities (where it is unclear whether a law applies); and overlap (where more than one law applies and more than one agency has authority over the same situation). With its initiative, the OCC is ''making certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation along with the supervision that supports it.'' The OCC's white paper has already been lauded by the American Bankers Association as lining up with its "core belief that banks should be empowered to innovate and that consumers should feel confident they have the same protections when doing business with any financial services provider—bank or nonbank." We share the ABA's enthusiasm for the white paper and hope that it will encourage national banks and federal savings institutions to play a more active role in marketplace lending and other innovations.

Two other federal agencies have shown recent interest in the development of mobile financial services technology. Last week the Federal Reserve Board released its annual survey on "Consumers and Mobile Financial Services." The OCC's white paper also follows the CFPB's Project Catalyst, an initiative launched in 2012 to encourage innovation and entrepreneurship in markets for consumer financial products and services. In February 2016, as part of Project Catalyst, the CFPB issued a policy statement on providing ''no-action'' letters (NALs) for innovative financial products or services that promise substantial consumer benefit, which state that the CFPB staff does not intend to initiate an enforcement or supervisory action against the requester with regards to a specific product or service. As discussed in our blog post, we were disappointed by the CFPB's final policy. The policy is unlikely to foster innovation for a number of reasons, including the fact that NALs provide no immunity against private litigation or enforcement actions by other federal and state government agencies. We praise the OCC for taking a leadership role with this initiative and hope that the CFPB will be supportive of the OCC's efforts.

The OCC will host a forum on responsible innovation on June 23, 2016, at Constitution Center in Washington, D.C. During the event, the agency will discuss comments received on the white paper and lead discussions regarding financial services innovation. The agency plans to release details on the agenda and how to register sometime this month.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.


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