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Small Business Economic Hearing on Financing Through Fintech
On October 26, the House Small Business Committee Subcommittee on Economic Growth, Tax, and Capital Access (Subcommittee) held a hearing entitled, “Financing Through Fintech: Online Lending’s Role in Improving Small Business Capital Access” to understand how small businesses obtain capital, examine various industry business models, and discuss the impacts of online lending in the marketplace. In introductory remarks, Subcommittee Chairman, Dave Brat (R-VA), identified small business access to capital as a top priority for the Subcommittee and noted that small businesses are increasingly looking to online lending as a means to access credit instead of traditional sources. The full list of witnesses and testimony is available here.
CSBS Announces Membership of Fintech Advisory Panel
On October 19, the Conference of State Bank Supervisors (CSBS) announced that 33 financial technology companies have agreed to serve on the CSBS Fintech Industry Advisory Panel. The goal of the panel is to identify ways to help modernize the state regulatory system. According to CSBS, the 33 participating companies range from start-ups to national brands and represent differing industry sectors, as well as, geographic locations and business models. The advisory panel will have three working groups, (i) money transmission and payments; (ii) lending; and (iii) community banking and innovation.
A complete list of the panel’s membership is here.
Federal Reserve Governor Calls for Collaboration Between Banks and Fintech Firms for Safe and Secure Payment System
On October 18, Federal Reserve Board Governor, Jerome H. Powell, spoke at the 41st Annual Central Banking Seminar regarding the impact of technology on retail banking and payment services. Powell noted that rapidly changing technology for more timely and convenient payment methods, “should not come at the cost of a safe and secure payment system. . .” In doing so, he encouraged banks, fintech companies, and all other stakeholders in the industry to collaborate to achieve a payment system that is reliable, secure, and convenient.
Powell went on to highlight the work of the Faster Payments Task Force (as previously covered by InfoBytes) and the Secure Payments Task Force. For secure payments, he discussed the Federal Reserve’s plan to launch a study analyzing payment security vulnerabilities in early 2018 and its plan to establish work groups focused on approaches for reducing the prevalence and cost of specific payment security vulnerabilities.
As covered by InfoBytes, the OCC Acting Comptroller of Currency, Keith A. Noreika, also recently spoke about the continuing innovation of banks and fintech companies within the financial technology sector.
OCC Acting Comptroller Discusses Innovation and Technology in the Financial Services Industry
On October 19, OCC Acting Comptroller of the Currency Keith A. Noreika spoke at Georgetown University’s Institute of International Economic Law’s Fintech Week to discuss innovation within the financial technology sector and its impact on the evolution of the financial services marketplace. “[W]hat has allowed the business of banking to evolve so successfully is that we have remained open to change and created a framework of laws and regulation over time that allows banking activities to evolve,” Noreika remarked. “[W]e have to be careful to avoid defining banking too narrowly or in a stagnant way that prevents the system from taking advantage of responsible advances in technology and commerce.”
Noreika spoke about the OCC’s Office of Innovation (Office), which was created earlier this year to facilitate discussions related to fintech and financial innovation. A pilot framework is currently being developed by the Office to create a “controlled environment” for banks to develop and test products to provide insight into a “proposed product’s controls and risks” and how it might possibly impact OCC policies in the future.
Noreika also discussed the OCC’s position on issuing special purpose national bank charters to non-depository fintech companies seeking to expand into the banking sector—a concept currently being contested by both the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS), and one which the OCC has not yet made a decision (See previous InfoBytes coverage of CSBS’ and NYDFS’ challenges here and here.) Addressing claims that fintech charters would inappropriately mix banking and commerce, Noreika refuted the argument and stated that his suggestion was to “talk to any company interested in becoming a bank and that commercial companies should not be prohibited from applying—if they meet the criteria for doing so.” Further, a “chartered entity, regulated by the OCC, would be a bank, engaged in at least one of the core activities of banking” as defined by the Bank Holding Company Act.
CFPB Issues Principles Concerning Security and Transparency for Financial Data Sharing and Third-Party Aggregation
On October 18, the CFPB published guidelines entitled “Consumer Protection Principles” (Principles), which are “intended to reiterate the importance of protecting consumers” when companies, including “fintech” firms, banks, and other financial institutions, get authorization from consumers to access their account data that reside in separate organizations to provide products and services. Earlier this year, industry groups responded to a CFPB request for information and weighed in on the benefits and risks associated with consumers authorizing third parties to access their financial and account information held by financial service providers. (See previous InfoBytes summary here.) Along with the Principles, the CFPB published a summary of stakeholder insights, which highlights the feedback received by the Bureau. Separately, on October 16, Senator Edward J. Markey (D-Mass.) sent a letter to Director Richard Cordray raising concerns about data security during the transfer of consumer data to third-party aggregators and highlighting the need for transparency concerning the use of the data.
The Principles address the following areas: (i) data access; (ii) data scope and usability; (iii) control of data and informed consent; (iv) payment authorizations; (v) data security; (vi) transparency on data access rights; (vii) data inaccuracies; (viii) dispute rights and unauthorized access resolution; and (ix) mechanisms for efficient and effective accountability.
Notably, the Bureau recognized that there already exist statutes and regulations that apply to consumer protections in this market. As such, the Principles “are not intended to alter, interpret, or otherwise provide guidance on—although they may accord with—the scope of those existing protections,” and therefore do not establish “binding requirements.”
CFTC Issues Primer on Virtual Currencies, Claims Certain Virtual Tokens Fall Under Its Oversight
On October 17, the U.S. Commodity Futures Trading Commission (CFTC) announced the release of “A CFTC Primer on Virtual Currencies” (Primer) issued by its LabCFTC division. As previously discussed in Infobytes, the LabCFTC initiative rolled out in May of this year to engage innovators in the financial technology industry to promote responsible fintech innovation within regulated CFTC markets. In this Primer—a first in a series—the CFTC discusses potential use-cases for virtual currencies and outlines the agency’s role and oversight of virtual currencies. The Primer also highlights the risks associated with virtual currencies, such as (i) the susceptibility of “digital wallets” to cybersecurity hacks; (ii) inadequate safeguards and other customer protection related systems on virtual currency exchanges; and (iii) the susceptibility of virtual currencies to Ponzi schemes and other types of frauds.
The CFTC noted that there’s no inconsistency between the SEC’s analysis that Initial Coin Offerings or Token Sales may be subject to federal securities law (see previous InfoBytes coverage here) and CFTC’s determination that virtual currencies are commodities and virtual tokens “may be commodities or derivatives contracts, depending on the particular facts and circumstances.” Last month, as discussed in InfoBytes, the CFTC also filed its first-ever antifraud enforcement action for activities involving Bitcoin investment solicitations.
Pennsylvania Issues Reminder to Fintech Companies of Licensing Requirements
On October 6, prompted by the “evolving technological innovations that impact the financial services sector” and the rise of “technology focused companies offering financial services via new delivery mechanisms,” the Pennsylvania Department of Banking and Securities (Department) issued a reminder of the Department’s “long-standing position” that all persons offering financial services to the consumers of the Commonwealth of Pennsylvania must be licensed by the Department and comply with consumer protection requirements before conducting business with Pennsylvania consumers. “The Department regulates financial transactions based upon the transaction offered or delivered, not the method of delivery,” and as a result, fintech companies must comply with all applicable statutes and regulations.
Russia Weighs Risks of Cryptocurrencies; President Putin Seeks Regulations
On October 10, the First Deputy Governor of Russia’s Central Bank reportedly announced plans to block websites selling bitcoin and other forms of cryptocurrency. Citing unreasonably high risks and the need to protect investors from the “dubious” currencies, the Central Bank’s concerns were echoed by President Vladimir Putin who reportedly stressed that risks associated with the use of cryptocurrencies include money laundering, tax evasion and funding for terrorism. However, President Putin issued a call for cryptocurrency regulation rather than a broad ban and stressed the need to utilize international experience when establishing rules.
Last September, as previously reported in InfoBytes, several Chinese regulators reportedly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies in the country.
SEC Announces Two Enforcement Initiatives Designed to Combat Cyber Threats
On September 25, the SEC announced the expansion of its Enforcement Division’s focus on cyber-related misconduct with the creation of a Cyber Unit and a Retail Strategy Task Force. The Cyber Unit will focus on areas such as (i) market manipulation schemes involving electronically-transferred false information; (ii) data breaches intended to obtain nonpublic information; (iii) distributed ledger technology and initial coin offering violations; (iv) misconduct through the use of the dark web; (v) retail brokerage account intrusions; and (vi) cyber-related threats targeting trading platforms and other critical market infrastructures. The Cyber Unit will complement the SEC’s internal assessment of its cybersecurity risk profile. (See previous InfoBytes coverage here.) The goal of the Retail Strategy Task Force will be to “develop proactive, targeted initiatives to identify misconduct impacting retail investors [and] apply the lessons learned from those cases and leverage data analytics and technology to identify large-scale misconduct affecting retail investors.”
OCC Acting Comptroller Shares Thoughts on Agency’s Innovation Efforts
On September 25, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Online Lending Policy Summit in Washington, D.C. to discuss ways the maturing banking industry can respond to changing market conditions through the adoption of new business models and adjustments to long-term strategies. “Some pundits see the growth of the online lending industry as a response to the nation’s banking industry. And some say that if the industry had been sufficiently agile and fully met the need for lending, alternative lenders would not have grown so rapidly,” Noreika stated. “I do not share that view. I see the growth of online lending and marketplace lenders as the natural evolution of banking itself.”
According to Noreika, about $40 billion in consumer and small business loans in the United States have been originated by marketplace lenders during the past decade, and since 2010, online lending has doubled each year. In fact, Noreika noted, “some analysts suggest that the market will reach nearly $300 billion by 2020, and others suggest as much as $1 trillion by 2025.” However, the online industry faces certain challenges and “adapting to new market conditions and effectively managing evolving risks” is pertinent to their success. Noreika highlighted recent innovation efforts by the OCC, such as the agency’s Office of Innovation’s “Office Hours,” which was created to facilitate discussions related to fintech and financial innovation. (See previous InfoBytes coverage here.) Another example is the OCC’s plan to develop “regulatory sandboxes” and bank pilot programs to “foster responsible innovation by OCC-supervised banks” as a means to expand the OCC’s own knowledge in this space. Importantly, Noreika addressed the OCC’s position concerning chartering of fintech companies that seek to expand into banking, along with the possibility of “offering special-purpose national bank charters to nondepository fintech companies engaged in the business of banking”—a concept currently being contested by both the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS). According to Noreika, the OCC has not yet decided whether it will exercise its authority to issue special purpose bank charters. (See previous InfoBytes coverage of CSBS’ and NYDFS’ challenges here and here.)
Finally, Noreika offered support for a legislative approach that would clarify the “valid when made” doctrine central to Madden v. Midland Funding, LLC by reducing uncertainty in establishing that “the rate of interest on a loan made by a bank, savings association, or credit union that is valid when the loan is made remains valid after transfer of the loan” and serving to reestablish a legal precedent that had been in place prior to the Madden decision, in which an appellate panel held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state law usury claims. (See previous InfoBytes coverage here.)