Regulators Embrace Innovation

Financial Services Law

“Innovation” is the keyword for regulators across the country, with the Federal Deposit Insurance Corporation (FDIC) announcing the agency will create an office to encourage banks to try out new financial technology and the Securities and Exchange Commission (SEC) launching what it dubbed a “FinHub.”

Not to be outdone, on the state level, Arizona accepted the first participant in its fintech sandbox and finalized a memorandum of understanding (MOU) with the financial regulator of Taiwan to expand the reach of the state’s program.

What happened

Expressing concern that financial regulators have actually discouraged innovation in recent years, FDIC Chair Jelena McWilliams announced the creation of an Office of Innovation at the agency to reverse this trend.

“We have created the regulatory framework where we have actually discouraged banks from innovating for a number of years,” McWilliams told attendees of the American Bankers Association Annual Conference, according to American Banker. “So innovation has been happening outside of banking primarily, and a very small percentage of it has happened within the community banks in particular that don’t have the resources, nor are they able to enforce the compliance mechanisms in place that would be needed where the regulators would look positively at innovation.”

The new FDIC office continues a recent movement among federal financial regulators to embrace innovation. The Consumer Financial Protection Bureau (CFPB) established its own Office of Innovation earlier this year, with a stated focus of “creating policies to facilitate innovation, engaging with entrepreneurs and regulators and reviewing outdated or unnecessary regulations.” Acting Director Mick Mulvaney noted that the growth of consumer-friendly innovation “is now a key priority for the Bureau.”

In another innovation-friendly move, the Office of the Comptroller of the Currency (OCC) announced that it will accept applications for special-purpose national bank charters for fintech companies, having previously set up a fintech innovation office.

During her remarks, McWilliams said the FDIC would consider innovation from a holistic perspective and proposed three ways the FDIC could address it: (1) through the industrial loan company; (2) how the agency regulates banks’ third-party vendor relationships; and (3) working with technology companies to improve processing, service and efficiency at banks.

“How can we encourage banks to innovate?” she asked. “How can we bring that within the banking sector?”

Recognizing the importance of financial technology to its constituencies, the SEC joined the innovation party with the launch of its Strategic Hub for Innovation and Financial Technology, or FinHub. A resource for public engagement on the agency’s fintech-related issues and initiatives, FinHub will cover topics ranging from automated investment advice to digital marketplace financing to artificial intelligence and machine learning to distributed ledger technology.

With a fintech forum focused on digital assets and distributed ledger technology scheduled for 2019, FinHub will also provide a portal for both industry and the public to engage with SEC staff on innovative ideas and technological developments, the agency said, and act as a platform and clearinghouse for SEC staff to acquire and disseminate information.

“The SEC is committed to working with investors and market participants on new approaches to capital formation, market structure and financial services, with an eye toward enhancing, and in no way reducing, investor protection,” SEC Chair Jay Clayton said in a statement. “The FinHub provides a central point of focus for our efforts to monitor and engage on innovations in the securities markets that hold promise, but which also require a flexible, prompt regulatory response to execute our mission.”

On the state level, Arizona’s innovation efforts are about to bear fruit with the acceptance of the first participant in the state’s “regulatory sandbox” program. Created earlier this year, the program allows participants to obtain access to the state’s market to test innovative financial products or services without first obtaining full state licensure.

The Office of the Attorney General began accepting applications in August, and Omni Mobile Inc. will be the first entity to jump in the sandbox.

Omni aims “to test cheaper and faster payment transfers through its centralized wallet infrastructure” by using its mobile payment platform to process guest payments at the Westward Look Wyndham Grand Resort and Spa in Tucson. Guests of the resort who are Arizona residents will receive a disclosure agreement about the company’s participation in the sandbox, along with an explanation of the test nature of the product, a privacy notice and the choice to opt out of any information sharing with Wyndham.

Omni was given two years to test its product.

“As other jurisdictions create sandboxes, we hope cooperation between regulators will allow companies to ‘passport’ into other regulatory jurisdictions, which may allow participants to scale more quickly and have access to multiple markets,” Arizona Attorney General Mark Brnovich said in a statement. “Fintech is changing the financial services industry, and regulators need to catch up.”

Seeking to expand the scope of the state’s sandbox program, the AG also announced a new cooperation agreement with Taiwan’s financial regulator. The MOU with the Financial Supervisory Commission (FSC) established a cooperation structure between Arizona’s sandbox and the FSC’s program in Taiwan, with the goals of creating an information-sharing arrangement between the regulators that could lead to business development, and testing eligible fintech products in both markets, the AG said.

To watch Chair McWilliams’ discussion at the conference, click here.

To read the SEC announcement, click here.

To read the Arizona AG’s announcement, click here.

Why it matters

From the FDIC to the SEC to the Arizona attorney general (not to mention the CFPB and OCC), both federal and state regulators are focused on innovation and looking to advance their engagement with fintech companies. The impact of these efforts may ultimately take a number of years to determine, but the private financial technology industry should at least be heartened by these governmental efforts.