On June 23, 2016, the Office of the Comptroller of the Currency (OCC) hosted a daylong forum, “Supporting Responsible Innovation in the Federal Banking System.” The purpose of the forum was to encourage a dialogue among stakeholders about what framework the OCC should adopt to encourage responsible innovation and provide guidance and oversight over the growing financial technology space. The forum was the latest action from an agency that has taken the lead in addressing the growth of financial technology, including issuing a white paper in March 2016 (that we reported on here) and developing a dedicated responsible innovation team within the agency. The forum provided a glimpse into where the OCC is heading in the short term, as well as the key issues the agency will be considering in the years to come.
Building off its March 2016 white paper, the agency reiterated its commitment to encouraging responsible innovation. “At its simplest, a responsible innovation is one that meets the changing needs of consumers, businesses, and communities; is consistent with sound risk management; and aligns with the company’s business strategy.” Although the agency identified responsible innovation as a “first guiding principle,” it cautioned that innovation may also pose risks, and that agency’s mission is to encourage innovation in a way that does not lead to consumer or systemic harm.
While the OCC is still in the initial stages of developing a regulatory response to the new forms and use of financial technology, a few central themes emerged as key issues being considered by the agency and stakeholders:
- Limited-purpose Charter – In response to great interest from participants, the OCC provided further comment on the possibility of the OCC creating a limited-purpose charter adapted to the unique business of fintech companies. While the OCC reaffirmed that the idea was under active discussion and consideration, it also stressed the “sanctity” of the charter, the need for careful consideration, and that a limited charter would not mean lighter supervision. The agency suggested that its approach may differ for depository and non-depository institutions, though no clear framework was set out. Based on discussions at the forum, the agency appears to have not made any decisions or commitments on the issue, and that any concrete movement toward a limited-purpose charter may not come for some time. To the extent such a charter is proposed, fintech companies should expect that even a “limited” charter will impose significant regulatory demands, and may not be appropriate for many companies.
- Dialogue and Guidance – The OCC emphasized its desire to maintain an open dialogue with all stakeholders, and provide a safe space for banks, fintech companies, and other participants in the industry to turn to for guidance and the rules of the road. The success of the OCC’s vision to be an industry-wide resource (including for entities outside its supervisory jurisdiction) will depend in large part on the ability for the OCC to promote collaboration and buy-in across the various regulatory agencies. Along those lines, the OCC has identified greater domestic and international collaboration as a key guiding principle in its future framework. The OCC also noted that it is exploring the proper structure of agency presence in the space, including potentially promoting a centralized office, group or body to act as a focal point for innovation issues. While the OCC acknowledged the need for additional regulatory guidance to industry participants, it noted that at this time it likely sees its role as looking for gaps in the existing framework, rather than developing an new regulatory framework.
- Bank Partnerships & Innovation – Bank partnerships were a common theme, with the OCC and others stressing the symbiotic relationship between banks and fintech companies. The OCC suggested that partnerships may be an effective way for banks to better serve their customer’s needs, and that innovation (whether through partnerships or through other means) will likely become an increasingly necessary component of a bank’s overall strategic planning. The OCC warned though that any such partnership should not be simply chasing the newest technology, but rather based on thoughtful planning and aligned with the bank’s overall strategic plan and risk management profile.
- Pilot Programs – A sandbox or pilot program concept emerged several times, with the OCC noting that it is still evaluating the scope, approach, and information that would be needed to launch a pilot program. While the OCC seemed to embrace the idea of initiating some type of program as an opportunity to engage in dialogue with the industry, it also noted that it would likely be difficult for the regulators to provide a safe harbor or free pass where the potential for consumer harm is involved.
- Financial Inclusion and Big Data – The use of technology to expand access to financial services was another common theme throughout the forum. Comptroller Curry and other agency representatives reflected that the speed, lower costs, and accessibility of financial technology through smartphones create a unique opportunity to reach unbanked and underbanked individuals. On the other hand, participants advocated on the need for care and consumer protections in the use of big data, including how it is collected, protected, and shared. Fintech companies and other innovators should expect increased scrutiny on the use of big data, particularly as related to privacy and fair lending concerns.
- Third-Party Risk Management – Numerous comments submitted in response to the white paper and during the forum voiced frustration over the OCC’s current third-party risk management guidance, commenting that the existing framework is ill-suited to the reality of bank partnerships and an impediment to innovation. In response, the agency noted that it would consider whether to “refresh” its third-party risk management guidance to better accommodate bank partnerships with new technology servicers.
- Community Reinvestment Act (CRA) – In its white paper, the OCC noted that it was considering providing additional guidance on what type of innovative activities may qualify for CRA consideration. The issue spurred significant comments, with many commentators voicing frustration that CRA credits are too often tied to a physical presence requirement that does not take into consideration the innovative ways technology can promote financial inclusion. Given the growing use of technology to deliver financial products and services, the industry should expect additional discussion and potential OCC guidance in this area.
As an immediate next step, the OCC has created a team to develop a conceptual and organizational framework for responsible innovation, building on many of the principles set forth in the white paper. Consolidating the principles in its white paper, the OCC identified five objectives moving forward:
- Develop organization structure options, such as an office of innovation or some other centralized committee;
- Establish a transparent and timely process for decisions and issuing communications to improve guidance and clarify the rules of the road;
- Create a formal outreach program that provides continuous learning regarding evolving financial services and customers’ needs;
- Implement an internal process for education and awareness that fosters an open and receptive culture, and ensures the workforce has the knowledge and skills to keep pace with industry changes; and
- Establish communication channels and information sharing mechanisms with other regulatory agencies.
Looking forward, stakeholders should expect the OCC to continue to play a leading role among regulators in the area of financial innovation. The most likely tools will be increased guidance in a few key areas (potentially CRA, third-party risk management), the creation of a dedicated office or committee to engage in outreach and dialogue with banks and non-banks alike, and the pilot programs run in coordination with the OCC.