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On February 11, the District of Columbia Department of Insurance, Securities and Banking announced the formation of the District of Columbia Financial Services Regulatory Sandbox and Innovation Council. The Council, which will examine the feasibility of implementing a financial services regulatory sandbox in the District, will also “develop a blockchain and innovation regulatory framework to facilitate financial services innovation in the District.” D.C. Mayor Bowser, who established the Council in January, has directed the advisory group to review barriers that fintech, insurtech, regtech, and other technology companies face when attempting to bring innovative services to the District, and to evaluate how these impediments can be mitigated or eliminated to foster innovation, including making recommendations for ways to reduce the regulatory burden on financial services providers that impede innovation. Among other things, the Mayor also has tasked the Council with studying the potential dangers regulatory sandboxes pose to consumers and the possible safeguards to such dangers. The Council—whose membership will include a cross section of professionals from the insurance, securities, banking, and lending industries; consumer representatives; technology industry members; and individuals specializing in financial services regulation and the captive insurance industry—will report legislative, programmatic, and policy recommendations to the Mayor within the first six months after its initial meeting.
On January 31, the United Kingdom’s Financial Conduct Authority (FCA) announced that the Global Financial Innovation Network (GFIN) officially launched and is now seeking cross-border testing applications. As previously covered by InfoBytes, in August 2018, the FCA announced the creation of the GFIN in collaboration with 11 other global financial regulators, including the CFPB. The network has now expanded to include 29 organizations, including financial regulators and other related entities, committed to supporting financial innovation. The GFIN has three primary functions: (i) to collaborate on innovation and to provide accessible regulatory contact information for firms; (ii) to provide a forum for joint regulation technology work; and (iii) to provide firms with an environment in which to trial cross-border solutions.
The announcement states that the network has opened a one month application window for firms interested in joining a pilot cohort for cross-border testing for new technologies. Firms interested in participating are required to meet the application requirements of all the jurisdictions in which they would like to test. Each applicable regulator will decide whether the firm’s proposed test meets the screening criteria and ensure safeguards are in place in their jurisdiction for testing. The deadline for testing applications is February 28.
On November 28, the Financial Industry Regulatory Authority (FINRA) filed a proposed rule change with the SEC to amend paragraph (a)(3) of FINRA Rule 4512(a)(3)—“Customer Account Information”—which will permit the use of electronic signatures consistent with the E-SIGN Act. Specifically, under the proposed rule, firms will be allowed to obtain electronic signatures of personnel exercising discretionary trading authority over customer accounts maintained by a member. FINRA acknowledges that “[g]iven technological advances relating to electronic signatures, including with respect to authentication and security” it now believes that the requirement for manual signatures is obsolete. If approved by the SEC, the proposed rule change will be published in a regulatory notice no later than 60 days following approval, and will take effect within 30 days following publication.
On November 13, Federal Reserve Governor Lael Brainard spoke at the “Fintech and New Financial Landscape” conference hosted by the Federal Reserve Bank of Philadelphia to discuss the potential implications associated with artificial intelligence (AI) innovation and advise regulators to remain diligent in their approach to understand and regulate the use of AI by financial institutions when augmenting or replacing traditional financial processes. Brainard’s prepared remarks emphasize the benefits and potential risks to bank safety and consumer protection that new AI applications pose. Noting, however, that many AI tools are proprietary and may be shielded from close scrutiny, Brainard suggested that existing regulations and supervisory guidance such as the Federal Reserve Board’s guidance on model risk management and vendor risk management could prove helpful in this space, which requires strong controls. Among other things, Brainard discussed the use of AI models to make credit decisions, and noted the risk of “opacity and explainability” challenges, which would make it difficult to explain how consumer credit decisions were determined and could “make it harder for consumers to improve their credit score by changing their behavior.” However, Brainard noted that the “AI community is responding with important advances in developing ‘explainable’ AI tools with a focus on expanding consumer access to credit.”
Brainard also commented that “[r]egulation and supervision need to be thoughtfully designed so that they ensure risks are appropriately mitigated but do not stand in the way of responsible innovations that might expand access and convenience for consumers and small businesses or bring greater efficiency, risk detection, and accuracy.” Moreover, supervisory guidance to firms must be read in the context of the “relative risk,” and the “level of scrutiny should be commensurate with the potential risk posed by the approach, tool, model, or process used.”
At the same conference, FDIC Chairman Jelena McWilliams also discussed the use of innovation to expand banking access to more consumers, including lower transaction costs and increases in credit availability, but emphasized that millions of “unbanked or underbanked” U.S. households do not experience these technological benefits. McWilliams stated that “[i]t will be up to institutions to leverage technology and develop products to reach these consumers.” McWilliams also discussed the FDIC’s planned Office of Innovation, which will, among other things, evaluate ways to support community banks with limited resources for fintech research and development and explore policy changes to encourage more innovation, particularly “in the areas of identity management, data quality and integrity, and data usage or analysis.” Additionally, McWilliams stated that advances in technology and data analytics will present opportunities for managing risk and change the process in which regulators handle oversight in areas such as Bank Secrecy Act/anti-money laundering compliance and consumer privacy.
CSBS files lawsuit over OCC’s fintech charter decision, arguing agency exceeds it authority under the National Bank Act
On October 25, the Conference of State Bank Supervisors (CSBS) filed a lawsuit against the OCC arguing that the agency exceeded its authority under the National Bank Act (NBA) and other federal banking laws when it allowed non-bank institutions, including fintech companies, to apply for a Special Purpose National Bank Charter (SPNB). As previously covered by InfoBytes, the U.S. District Court for the District of Columbia dismissed CSBS’s challenge last April on ripeness grounds because the OCC had not yet issued a fintech charter to any firm. But CSBS renewed its challenge in light of the OCC’s July announcement welcoming non-depository fintech companies engaging in one or more core-banking functions to apply for a SPNB (previously covered by Buckley Sandler Special Alert here), and statements indicating the OCC is currently vetting several companies and expects to make charter decisions mid-2019.
Among other things, the complaint argues that the SPNB program (i) exceeds the OCC’s statutory authority because the OCC may not “redefine the business of banking” to include non-depository institutions; (ii) is “arbitrary, capricious, and an abuse of discretion” because it inadequately addresses, without explanation, “the myriad policy implications and concerns raised by the public” and the “cost-benefit” tradeoffs; (iii) did not include the proper notice and comment period for preemption interpretations under the NBA; and (iv) is an improper invasion of “state sovereign interests.”
On October 17, Federal Reserve Governor Lael Brainard spoke at the “FinTech, Financial Inclusion—and the Potential to Transform Financial Services” conference hosted by the Federal Reserve Bank of Boston and the Aspen Institute Financial Security Program to discuss ways in which fintech can improve financial access for underserved families and small businesses. Brainard argued that, although new technologies can lower transaction costs, access to accounts and credit—while beneficial—does not, by itself, overcome the barriers to financial inclusion. Brainard stressed that continued progress toward financial inclusion is likely to require solutions designed with an understanding of issues the underserved face, such as examining why many unbanked or underbanked people intentionally choose not to maintain a bank account and recognizing the need to support faster payment systems for those living paycheck to paycheck. Brainard cautioned, however, that new fintech products may create consumer data security and privacy issues, and that fintech may struggle to reach communities lacking the infrastructure for digital service delivery. The challenge as regulators, she stated, “is to ensure trust in financial products and services by maintaining the focus on consumer protection, while supporting responsible innovation that provides social benefits.”
On October 16, the CFPB announced the launch of its new webpage for innovation, which aims to engage with entrepreneurs and the innovation community to promote competition, innovation, and consumer access within financial services. The webpage is a result of the Bureau’s new Office of Innovation (previously known as Project Catalyst) and includes information regarding the Global Financial Innovation Network and the Bureau’s proposed revisions to the Trial Disclosure Program Policy (previously covered by InfoBytes here and here). The webpage also encourages groups to “pitch a pilot” to work with the Bureau on consumer-friendly innovation ideas.
On October 18, the SEC announced the launch of its Strategic Hub for Innovation and Financial Technology (FinHub). According to the SEC, FinHub will assist in facilitating public engagement on fintech-related topics, including blockchain/distributed ledger technology, digital marketplace financing, automated investment advice, and artificial intelligence/machine learning. Through FinHub, industry participants and the public will have the opportunity to engage directly with the SEC to discuss and test innovative ideas and technological developments. FinHub will also act as a clearinghouse for SEC staff to access and disseminate fintech-related information throughout the agency, and will “[s]erve as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems.”
“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,” SEC Chairman Jay Clayton announced.
On October 11, the Arizona Attorney General announced the state’s first fintech sandbox participant. The mobile payment platform company will test its product—a centralized wallet infrastructure designed to create “cheaper and faster payment transfers”—for two years by processing guest payments at a Tucson resort. Arizona resident-guests will receive a disclosure agreement outlining the company’s participation in the sandbox, an explanation of the test product, a privacy notice, and the ability to opt out of any information sharing with the resort. As previously covered by InfoBytes, the Arizona governor signed legislation in March creating the first state sandbox program for companies to test innovative financial products or services without certain regulatory requirements.
The Attorney General also announced the finalization of a Memorandum of Understanding (MOU) with Taiwan’s financial regulator, the Financial Supervisory Commission, to increase the reach of the state’s sandbox program. The MOU will establish an information sharing agreement “that may result in the opportunity for businesses to develop/test eligible [fintech] products in both markets,” the release stated.
On October 10, the Financial Stability Board (FSB) published a report, which asserts that although “crypto-assets do not pose a material risk to global financial stability at this time,” there may be implications for financial stability in the future as market developments evolve. The newest report, “Crypto-asset markets: Potential channels for future financial stability implications,” follows a July report discussing the FSB’s framework for monitoring and assessing vulnerabilities in the financial system resulting from developments in the crypto-asset markets. (See previous InfoBytes coverage here.) According to the October report, the FSB conducted an assessment which considered the primary risks present in crypto-assets and their markets, such as “low liquidity, the use of leverage, market risks from volatility, and operational risks,” and determined that, “[b]ased on these features, crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value, or a mainstream unit of account.” However, the October report discussed challenges to assessing and monitoring potential risks and commented on the following implications that may arise from the evolving use of crypto-assets: (i) reputational risks to financial institutions and their regulators; (ii) risks from direct or indirect exposures of financial institutions; (iii) risks resulting from the use of crypto-assets in payments and settlements; and (iv) risks from market capitalization and wealth effects.
- Kathryn L. Ryan to discuss "NMLS usage" at the NMLS Annual Conference & Training
- Jeffrey S. Hydrick to discuss "State legislative update" at the NMLS Annual Conference & Training
- Kathryn L. Ryan to speak at the "Business model primer" at the NMLS Annual Conference & Training
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program