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Nevada authorizes a regulatory sandbox program
On June 13, the Nevada governor approved SB 161, which requires the Director of the Department of Business and Industry to establish and administer the “Regulatory Experimentation Program for Product Innovation.” If the Director approves an applicant to participate in the Program, the participant’s product or service will be generally exempt from certain statutory and regulatory requirements related to financial products or services. Under the legislation, any consumer of the product or service must be a resident of Nevada and not more than 5,000 consumers may be provided the product or service during the period of testing, unless the Director approves up to 7,500 consumers. Participants must make certain disclosures to consumers, including, if applicable, that the participant does not hold a license to provide a product or service outside of the program and method of submitting a complaint to the Director. The Director may also require additional disclosures. The legislation also authorizes the Director to establish participant-reporting requirements by regulation and generally limits participation in the program to 2 years, although a participant may seek an extension of this period to apply for any license or other authorization otherwise required for the product or service. The legislation is effective on June 13 for the purpose of adopting any regulations and performing any other preparatory administrative tasks that are necessary to carry out the provisions of the bill, and on January 1, 2020, for all other purposes.
Democratic Senators ask regulators about fintech discriminatory lending
On June 10, Senators Elizabeth Warren (D-Mass.) and Doug Jones (D-Ala.) wrote to the Federal Reserve Board, the OCC, the FDIC, and the CFPB requesting information regarding the role the regulators can play in ensuring that fintech companies serve consumers on a nondiscriminatory basis. The letter asserts that ,while the fintech business model—using algorithms to underwrite loans, typically without face-to-face interaction with consumers—has “the potential to expand access to financial services for underserved populations,” it also has the potential to lead to discriminatory results. Based on recent reports cited in the letter, the Senators ask the regulators to, among other things, (i) identify what their agency is doing to combat lending discrimination by lenders using algorithmic underwriting; (ii) explain how the agencies’ oversight of fair lending laws extend to the fintech industry; and (iii) describe any analyses conducted on the impact of fintech algorithms on minority borrowers. The letter requests the agencies respond to the inquiries by June 24.
OCC wants final judgment in NYDFS fintech charter challenge
On May 30, the OCC filed a letter with the U.S. District Court for the Southern District of New York notifying the court that it intends to work with NYDFS to issue a proposed final order to the court in the action challenging the OCC’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB). As previously covered by InfoBytes, in May, the court denied the OCC’s motion to dismiss, concluding that, among other things, the OCC failed to rebut NYDFS’s claims that the proposed national fintech charter posed a threat to the state’s ability to establish its own laws and regulations, and therefore, the challenge “is ripe for adjudication.” In its letter, the OCC states that while it “disagrees with the Court’s decision, and reserves its right to appeal, it believes that the decision renders entry of final judgment in this matter appropriate.” An entry of final judgment, would allow the OCC to challenge the decision with the U.S. Court of Appeals for the 2nd Circuit.
Pennsylvania court holds mobile giving app not required to be licensed as a money transmitter
On May 30, the Commonwealth Court of Pennsylvania reversed an order by the Pennsylvania Department of Banking and Securities Commission (Commission) issued against a mobile giving app and two of its executives (petitioner), holding that the petitioner was not required to be licensed by the Commission because it was not transmitting money under the court’s interpretation of the Pennsylvania Money Transmitter Act (Act). In 2016 the Compliance Office of the Department of Banking and Securities (Department) issued an order to cease and desist against the petitioner for transmitting money in the state without a license as required under the Act. At issue was whether petitioner’s activities constituted “transmitting money” under the Act, or merely involved collecting and supplying information. The Department claimed the petitioner’s app was “an indispensable part of a chain of events through which money was transferred from the donors to the recipients of the donations.” However, the petitioner argued that the app simply connected donors to the recipients, and that the actual transmission of money was outsourced to a payment processor who conducted the actual transactions.
The six-judge majority stated that the Commission’s interpretation of the Act was too broad, holding that “[o]n a basic and critical level, the Commission erroneously interpreted the terminology ‘engage in the business’ in an overly expansive manner and essentially read it as prohibiting any conduct that contributes toward—or has a tangential involvement with—the concrete and real act of ‘transmitting money.’” Moreover, “the key term in ascertaining the defining characteristic of the conduct that is proscribed by the statute is ‘transmitting,’” and while the petitioner’s “software application can be deemed to have acquired and ‘transmitted’ information vital to the donative transactions to [the payment processor], by no means was [the petitioner] ‘transmitting money’ itself, or transmitting some other ‘method for the payment’ of the donation, ‘from one person or place to another.’”
U.S., UK establish “Financial Innovation Partnership”
On May 29, the Department of Treasury announced the establishment of a Financial Innovation Partnership (FIP) between the U.S. and the UK. The FIP will focus on expanding bilateral financial services collaborative efforts to study emerging fintech innovation trends and share information and expertise on regulatory practices. Specifically, the FIP will focus on (i) regulatory engagement, including building upon “existing regulatory cooperation by discussing regulatory developments and sharing experiences on technical issues related to innovation in financial services,” and (ii) commercial engagement, such as providing cross-border opportunities for private sector companies to engage with industry associations as well as market participants. The FIP was announced during a meeting of the U.S.-UK Regulatory Working Group, which, a week earlier, held discussions in Washington, D.C. on the outlook for financial regulatory reforms, future priorities, regulatory cooperation, and possible implications of the UK’s exit from the EU on financial stability and cross-border financial regulation.
FTC introduces dedicated fintech webpage
On May 24, the FTC announced the launch of a dedicated fintech resource page hosted on the agency’s business center website. The fintech page contains the following materials: (i) guidance, including Safeguards Rule and Privacy Rule compliance information; (ii) videos that will be regularly rotated discussing topics such as artificial intelligence and blockchain; (iii) related posts containing relevant information on small business financing and recent fintech enforcement actions; and (iv) legal resources, including relevant cases and staff reports.
FinCEN announces innovation hours program
On May 24, the Financial Crimes Enforcement Network (FinCEN) announced a new program that will provide opportunities for fintech/regulatory technology companies and financial institutions to showcase new and emerging innovative approaches for combating money laundering and terrorist financing and to demonstrate how other financial institutions could use similar technologies. The FinCEN Innovation Hours Program will accept meetings once per month, with primary consideration given to entities that are already operational. According to FinCEN, the program is part of a broader initiative introduced last year (previously covered by InfoBytes here and here) that encourages banks and credit unions to explore innovative approaches such as artificial intelligence, digital identity technologies, and internal financial intelligence units to combat illicit financial threats, as well as collaborative arrangements to share resources and enhance the effectiveness and efficiency of Bank Secrecy Act/anti-money laundering compliance programs.
Florida establishes blockchain task force
On May 23, the Florida governor signed SB 1024, which establishes the “Florida Blockchain Task Force” within the Department of Financial Services to “explore and develop a master plan for fostering the expansion of the blockchain industry in the state, to recommend policies and state investments to help make this state a leader in blockchain technology, and to issue a report to the Governor and the Legislature.” Within 90 days of signing, the bill requires that a majority of the 13 required members of the task force must be appointed and the task force must hold its first meeting. The task force is required to, among other things, study blockchain technology and submit a report to the Governor and the Legislature with recommendations for implementing blockchain technology in the state and recommendations for specific implementations to be developed by relevant state agencies. The bill took effect on May 23.
OCC highlights key banking risks
On May 20, the OCC released its Semiannual Risk Perspective for Spring 2019, identifying and reiterating key risk areas that pose a threat to the safety and soundness of the U.S. federal banking system, focusing on the following risk areas: credit, operational, compliance, and interest rate. The OCC noted that rapid growth within the fintech and regulatory technology space impacts each of these risk areas, which the agency is monitoring closely in order to implement necessary actions to address concerns. Overall, although the OCC acknowledged that the health of the federal banking system remains strong, specific risk areas of concern include (i) the need to have in place appropriate risk management practices as well as methods for assessing “the quality and timeliness of credit risk identification, risk mitigation, and loan loss reserve methodology”; (ii) elevated operational risk as banks adapt to a changing and increasingly complex operating environment, including cybersecurity threats, fintech innovation, and a reliance on third-party providers; (iii) high compliance risk related to Bank Secrecy Act/anti-money laundering (BSA/AML), as well as challenges facing banks to “effectively manage money-laundering risks in a complex, dynamic global operating and regulatory environment”; and (iv) potential challenges to earnings due to interest rate risk and liquidity risk, which lead to increased difficulties when forecasting liability costs.
Concerning BSA/AML risk, the OCC specifically noted that AML-related deficiencies “stem from three primary causes: inadequate customer due diligence and enhanced due diligence, insufficient customer risk identification, and ineffective processes related to suspicious activity monitoring and reporting, including the timeliness and accuracy of Suspicious Activity Report filings. Talent acquisition and staff retention to manage BSA/AML compliance programs and associated operations present ongoing challenges, particularly at smaller regional and community banks.” The report reminded banks that necessary training, quality assurance, independent testing, and control updates are expected to be implemented during the FY 2019 examination cycle as required under the Financial Crimes Enforcement Network’s customer due diligence rule (previously covered by InfoBytes here).
“Innovation can enhance a bank’s ability to compete by introducing new ways to meet customer product and service needs, improve operating efficiencies, and increase revenue,” the OCC noted, but changing business models or offering new products and services can “elevate strategic risk when pursued without appropriate corporate governance and risk management.”
House Financial Services Committee creates fintech, AI task forces
On May 9, the House Financial Services Committee announced the creation of a Task Force on Financial Technology as well as a Task Force on Artificial Intelligence. Representative Stephen Lynch (D-MA) will chair the Task Force on Financial Technology, which will explore the use of alternative data in loan underwriting, payments, big data, and data privacy challenges. Representative Bill Foster (D-IL) will chair the Task Force on Artificial Intelligence, which will focus on understanding ways to utilize AI within the financial services industry. It will also examine issues related to algorithms, digital identities, and combatting fraud. Both task forces will expire on December 9.