“It was a bright cold day in April, and the clocks were striking thirteen.” – George Orwell, 1984.
Bank Regulators to Fintech: We Hear You
Secretary of the Illinois Department of Financial and Professional Regulation Bryan A. Schneider wrote this week for the American Banker:
The intersection of financial services and technology is rapidly changing the lives of citizens in my home state of Illinois and across our country. Potential homeowners can now apply for a mortgage on their phone and get an answer within 15 minutes, rather than in several days. Instead of grabbing a wallet, people can transfer money to almost anyone instantly using an app.
State regulators are committed to building the regulatory platform for the future of fintech that will enhance and accelerate the kind of smart innovation that benefits and protects consumers.
The benefit of state regulation is that we are closer to the consumer and better understand the needs of local communities. But the cost of state regulation is that companies that want to operate nationally have to comply with different state laws and requirements, which can enhance consumer and taxpayer protections, but adds friction. We need to reduce this friction.
That is why in my role as the state bank and financial services regulator for Illinois I recently hosted representatives from local and national fintech companies, along with financial regulators from other states, to discuss fintech regulation and how to make it work better.
The conversation was both vigorous and enlightening. We discussed multistate licensing requirements and the need to further simplify that process. We discussed the need for more uniform money transmission laws, making it easier for companies to enter that particular market. We were told that while the Nationwide Multistate Licensing System — the common platform for state regulation — is a great tool to submit company information to multiple jurisdictions all at one time, a lack of uniformity in state requirements results in regulatory inconsistency, which is a pain point for industry.
Then we dug into the details of standards for financial requirements, such as net worth, bonding and permissible investments. This was another area where the industry said efforts toward more uniformity would reduce barriers to entry and barriers to scale for fintech firms.
We also discussed a concept known as “passporting” or reciprocity, where a firm could use regulatory approval from one state as a passport to operate in another state.
All of these ideas are worth exploring. And I am committed to ensuring this dialogue continues.
To that end, I am calling upon my fellow state financial regulators and the Conference of State Bank Supervisors to convene a fintech advisory group as a means to continue this dialogue. I believe such a group could provide advice and formal feedback on a broad range of important issues impacting this growing industry.
As fintechs continue to evolve in response to the needs of consumers, state regulators must evolve as well to ensure an appropriate system of oversight that not only protects consumers, but fosters innovation. And industry feedback is a key element in our ability to achieve meaningful change.
State Regulators Meet with Representatives in Washington, D.C.
State regulators from around the country gathered in Washington, D.C. this week to meet with their elected representatives. During their meetings, state regulators shared details on their role in state and local economies, asked Congress to ensure that certain federal regulatory vacancies that require state regulatory or community banking experience are filled appropriately, and urged Congress to support a right-sized regulatory framework for community banks, and to weigh in on the prospective national bank charter for fintech companies being prepared by the Office of the Comptroller of the Currency.
Of note, the regulators met with the Federal Reserve Board of Governors, and heard from leading Members of Congress involved in financial regulation, such as House Finance Services Chairman Jeb Hensarling (R-Tex), ranking member on the same committee Rep. Maxine Waters (D-Cal), and Senate Banking Committee Chairman Mike Crapo (R-Id). A discussion also took place on the history of the Federal Reserve system and possible reforms, Cam Fine of the Independent Community Bankers Association talked about the prospects of regulatory reform, and representatives of the Wall Street Journal and American Banker described the Trump Administration's first 100 days from a reporter's perspective.
In a related matter, Sen. Crapo also led a committee hearing this week on regulatory reform that would benefit smaller institutions, in particular.
CSBS and state regulators are seeking congressional action to:
- Establish a right-sized regulatory framework for community banks, so they are not subject to stringent rules intended for larger, systemically important banks
- Provide meaningful regulatory relief that increases a community bank's funding, simplifies regulatory capital and reporting requirements, and promote new bank formation
- Amend the Bank Service Company Act to encourage state-federal coordination on third-party service provider examinations so that banks and non-banks can work together more easily
During the fly-in, CSBS released a new promotional video that explains the role of state financial regulators.
New York Superintendent to Federal Regulators: “Follow Our Lead”
New York Superintendent Maria Vullo sat down with the American Banker this week to share her state’s progress on fintech regulation and supervision. Excerpts from the discussion are included below. Access to the full story requires an American Banker subscription.
What are your main concerns with the OCC fintech charter?
First and foremost, from a state regulator’s perspective, and particularly in New York, we already regulate money transmitters and other licensed financial services… Second, the usury requirements that could be evaded by an OCC charter are of extreme concern to me… Third, I have significant concerns about the potential for the OCC to charter non-depository institutions under the current statutory authority that exists for the OCC to charter banks, and that's the National Bank Act.
How do you plan to fight it?
We are in constant consultation with other state banking supervisors across the country, through our association, the Conference of State Bank Supervisors, which also opposes this charter. As to what the appropriate steps would be if they actually go forward, we hope that given the comments that they've received, that they will think twice about the proposal.
What can states do to make the licensing system simpler?
We've been doing this for some time through the CSBS.
We have collaboration and coordination with other state banking supervisors such that … [for] an institution that has its charter from one state, and then seeks to, for example in the bricks-and-mortar world, open a branch in another state.
Around the States
NE: Governor Rickets signed a bill that represents the most comprehensive update to Nebraska’s Banking Act in over 50 years. The goal of the update is to reduce regulatory complexity and carefully update the Act to reflect the current banking environment, while protecting consumers and preserving the public confidence in the financial institutions of Nebraska.
WA: Former agency deputy director Gloria Papiez has been confirmed as the new Director of the Washington State Department of Financial Institutions (DFI). Papiez served as acting director since November 2016 following the retirement of Scott Jarvis.
WA: The Washington State Department of Financial Institutions (DFI) partnered with the National Cyber Security Alliance (NCSA) to present a Cyber Security Workshop for Small and Medium Businesses March 23 to help licensees better understand how to identify, protect from, detect, respond to and recover from cyber security attacks.
Congress: The Senate Banking Committee held a hearing Tuesday on “Fostering Economic Growth: the Role of Financial Companies.” During the hearing, bipartisan support was expressed for community banks and broad regulatory carve-outs for institutions with less than $10 billion in assets.
"I can attest to the power behind the numbers. I have never seen so many state regulators, congressmen, and community groups come out so strongly against a rulemaking process. It definitely changed the way we reported on the OCC’s rules. It’s rare that I see such force behind a movement.”
- Wall Street Journal reporter Rachel Witkowski, speaking to a group of state regulators about the opposition to the OCC’s federal fintech charter.