In September 2016, Representative Patrick McHenry (R-NC) introduced H.R. 6118, the “Financial Services Innovation Act of 2016” (“FSIA”). FSIA is intended to encourage the development of financial products and services by FinTech innovators, including financial institutions, technology companies and entrepreneurs. FSIA mandates the creation of a Financial Services Innovation Office (a “FSIO”) within each federal banking agency as well as a number of other federal agencies having jurisdiction over types of financial services, including the CFPB, the CFTC, the FTC, the SEC, HUD and the Treasury Department (“Covered Agencies”).
FinTech has existed for years in the form of home banking, mobile payment systems, ATMs and other familiar products and services. It has attracted greater interest in recent years due to the development of more sophisticated technology and entrepreneurs in the financial services arena. Many of the laws and regulations that currently govern the delivery of financial services and products were implemented pre-FinTech and the coordination of these laws with FinTech products and services will require flexibility on the part of both regulators and the banking industry. Many commentators in the industry are supporting the concept of the OCC authorizing the chartering of national banks to focus on providing FinTech services while perhaps forgoing making loans or accepting deposits.
Within the past year FinTech has received considerable attention of the financial services industry and the banking regulators. The Office of the Comptroller of the Currency (the “OCC”), the regulator of national banks and federal savings banks, has addressed FinTech at various conferences within the past year, issued a whitepaper on this topic in March 2016 and hosted a one day forum in June 2016 entitled “Supporting Responsible Innovation in the Federal Banking System.” In the whitepaper the OCC requested comment on a number of areas, including how can the OCC facilitate responsible innovation and enhance its process for monitoring and assessing innovation within the federal banking system. The OCC established eight basic principles in guiding its development of a framework for evaluating FinTech products and services by its regulated institutions. These principles call for the OCC to (1) support responsible innovation, (2) foster an internal culture receptive to responsible innovation, (3) leverage agency experience and expertise, (4) encourage responsible innovation that provides fair access to financial services and fair treatment of consumers, (5) promote safe and sound operation through effect risk management, (6) encourage all banks to integrate responsible innovation into their strategic planning, (7) promote dialog through formal outreach and (8) collaborate with other regulators.
Establishment of FSIO
Each Covered Agency must establish a FSIO to promote “financial innovation” and to assist a petitioner whose request for regulatory relief has been granted. Each agency, acting through its FSIO, must (1) support the development of financial innovations, (2) coordinate the sharing of information with the FSIOs of other agencies and (3) establish procedures to reduce the time and cost of offering a financial innovation to the public and enable greater access to financial innovations. Financial innovation is defined as any innovative financial product or service, the delivery of which is enabled by technology.
FSIA imposes an affirmative obligation upon the Covered Agencies, which respect to a petitioner whose request has been granted, to (1) assist the petitioner to address issues of how existing regulations apply to the innovation, (2) assist the petitioner in complying with the requirements of the federal regulators of the financial innovation and (3) assist the petitioner in responding to any challenges to a modification or waiver from the application of a federal statute or regulation that was granted.
The agency may also modify or waive the application of a federal statute under which the agency has rulemaking authority if it determines the regulation is burdensome to the petitioner. No guidance has been provided as to what is considered “burdensome.”
Identification of Applicable Regulatory Areas
Within 60 days of the enactment of FSIA and bi-annually thereafter, each agency must publish in the Federal Register three or more areas of existing regulations under its oversight (1) that apply or might apply to financial innovation and (2) that the agency might consider modifying or waiving if the agency were to receive a petition for an alternative compliance strategy for addressing compliance with the particular regulation.
Petition for Regulatory Relief
Any person who offers or intends to offer a financial innovation product or service may petition the affected agency’s FSIO to enter into an enforceable compliance agreement that would contain a modification or waiver of a federal agency regulation or a federal statute under which the agency has supervisory or rulemaking authority. Another federal agency or state agency may not commence an enforcement action with respect to a financial innovation that is subject to such an agreement.
The petition must contain an alternative compliance strategy to comply with the regulations or statute and demonstrate that under the alternative strategy the financial innovation (1) would serve the public interest, (2) improves access to financial products or services, (3) does not present systemic risk to the United States financial system and (4) promotes consumer protection. During the agency’s consideration of the petition it may not take an enforcement action against the petitioner relating to the financial innovation that was subject to the petition. If the financial innovation presents an immediate danger to consumers or systemic risk to the United States the agency may seek injunctive relief to prevent the person from offering such financial innovation.
Not later than 30 days after receiving a petition, the Covered Agency must publish the petition in the Federal Register and provide a 60 day public comment period. The notice and comment period may be waived if the agency determines the petition is similar to one that has been previously granted. The agency must maintain the confidentiality of any non- public information contained in the petition. The agency must make its determination within 30 days after the end of the comment period, or if waived, within 60 days after receipt of the petition. In the event a petition is rejected, the person may resubmit the petition.
FSIO Liaison Committee
FSIA requires the creation of a FSIO Liaison Committee to coordinate, among other things, the sharing of information regarding petitions that the Covered Agencies might receive and to monitor proposals and developments related to financial innovation. The committee is required to meet twice a year as well as to hold four public field hearings each year and gather information from the public as well as to provide information and advice to the public.
Womble Carlyle’s FinTech Team provides legal counsel to financial institutions, technology companies and entrepreneurs on, among other things, ensuring compliance with applicable laws, negotiating technology contracts and representing clients before federal agencies.