Taking another step in its responsible innovation initiative, the Office of the Comptroller of the Currency (the “OCC”) recently announced that it will consider granting special purpose national bank charters to FinTech companies and is soliciting public comment on a number of questions. The comment period closes on January 15, 2017.
The OCC has precedential authority to charter a limited purpose national bank as long as it conducts one of the three main core banking functions: (1) receiving deposits, (2) paying checks (and modern equivalents such as debit cards, electronic payment processing and digital currency) or (3) lending money. The OCC has relied on this authority to charter two types of limited purpose banks: trust banks and credit card banks.
Reasons for Charter
The OCC contends that a federal charter is in the public interest, noting that FinTech companies have the potential to empower consumers and assist families and businesses to take more control of their financial matters; that there are more than 4,000 FinTech companies in the United States and the United Kingdom alone; and that investment in this sector has grown from $1.8 billion to $24 billion worldwide in the past five years.
The OCC cited three primary reasons for its decision. First, applying a bank regulatory framework to FinTech companies will help ensure that they operate in a safe and sound manner as they explore new ways to serve the needs of customers, businesses and communities. Second, applying the OCC’s uniform supervisory structure will promote consistency in the application of law and regulation and ensure fair access to and inclusion of consumers. Third, providing a path for FinTech companies to become national banks can make the federal banking system stronger by subjecting them to OCC examination and oversight and encouraging responsible innovation.
Benefit of National Bank Charter
The primary benefit of a national bank charter is the federal preemption of state licensing and examination requirements and other state laws that prevent or significantly interfere with the exercise of a bank’s powers. For the large number of FinTech companies that operate or will operate in multiple states, the elimination of varied and inconsistent state licensing requirements and examination procedures may prove to be an attractive tradeoff for being subject to the OCC’s regulatory, compliance, safety and soundness regimen. In addition, national bank chartered FinTech companies may experience greater access to capital and to an expanded base of financial institution customers as investors and financial institutions may be more likely to invest in or do business with a regulated entity.
Baseline Supervisory Expectations
The OCC stated that it would hold a FinTech national bank to the same rigorous standards of safety and soundness, fair access and fair treatment of customers that apply to all national banks and federal savings associations, but that it would account for differences in business models and applicability of certain laws. The OCC identified a number of baseline supervisory expectations for any entity seeking a national bank charter.
"Robust, well developed business plan." The business plan is a key component of any charter proposal and should reflect comprehensive, in-depth planning by the organizers, the Board of Directors and management. The business plan should, among other things, clearly articulate why the company is seeking a national bank charter, address strategic, operational, capitalization and financial initiatives covering at least a three year time period, and provide alternative business strategies to address various best and worst case scenarios.
"Governance Structure." The governance structure must be commensurate with the risk and complexity of the proposed products, services and activities, as is the case for any de novo national bank. The OCC noted that board members must actively oversee management and exercise independent judgment. Specifically, the board and management must have the expertise, financial acumen and risk management framework to satisfy the OCC’s safety and soundness requirements.
"Capital and Liquidity." FinTech national banks will be required to adhere to regulatory capital and liquidity requirements commensurate with the risk and complexity of the proposed activities (including on and off-balance sheet activities).
"Compliance Risk Management." An applicant for a FinTech national bank charter would be expected to demonstrate a culture of compliance that includes a top-down enterprise-wide commitment to understanding and adhering to applicable laws and OCC supervisory guidance. In particular, the OCC noted that it would require (1) a compliance program designed to ensure and monitor compliance with the requirements imposed by the BSA, other AML statutes and regulations and OFAC economic sanctions obligations and (2) a consumer compliance program designed to ensure fair treatment of customers and fair access to financial services as well as compliance with the FTC Act, the unfair, deceptive or abusive acts or practices prohibitions of Dodd-Frank and all other applicable consumer financial protection laws.
"Financial Inclusion." The OCC noted its statutory mission includes ensuring that national banks treat customers fairly and provide fair access to financial services. This mission is advanced, in part, by the Community Reinvestment Act. A FinTech national bank would not be subject to the CRA unless its proposed business activitiy includes accepting deposits. The OCC would, however, expect a FinTech national bank that engages in lending activities to demonstrate a commitment to financial inclusion that supports fair access and fair treatment of customers.
"Recovery and Exit Strategies, Resolution Plan and Authority." The OCC expects a proposed FinTech national bank’s business plan to include alternative business strategies and recovery strategies to address various best and worst-case scenarios. The business plan should also articulate specific financial or other risk triggers that would prompt the FinTech national bank to unwind the operations in an organized manner. The OCC may also require the business plan to include a clear exit strategy.
The OCC generally intends to follow its established chartering process for FinTech companies seeking a national bank charter. The Comptroller has requested that OCC staff develop and implement a formal agency policy for evaluating applications for FinTech charters. The policy will articulate specific criteria for approval as well as issues that the OCC should consider and conditions that should be met before granting such charters. Any FinTech company seeking a national bank charter will need to familiarize itself with the chartering process and engage experienced advisors to assist in the process. The OCC recognizes that it may need to tailor some of the requirements that apply to full service banks to address the business model of a special purpose national bank. In addition, the chartering process will likely undergo adjustments as the OCC gains experience processing early charter applications.
The OCC is seeking public comment in a number of areas, including:
- What are the public policy benefits and the risks of approving FinTech companies to operate under a national bank charter?
- Should the OCC seek a financial inclusion commitment from an uninsured special purpose national bank that would not engage in lending, and if so, how could such a bank demonstrate a commitment to financial inclusion?
- How could a special purpose national bank that is not engaged in providing banking services to the public support financial inclusion?
- What are the potential challenges in executing or adapting a FinTech business model to meet regulatory expectations, and what specific conditions governing the activities of special purpose national banks should the OCC consider?
- What actions should the OCC take to ensure special purpose national banks operate in a safe and sound manner and in the public interest?
- Would a FinTech special purpose national bank have any competitive advantages over full-service banks that the OCC should address? Are there risks to full-service banks from FinTech companies that do not have bank charters?
- Are there particular products or services offered by FinTech companies, such as digital currencies, that may require different approaches to supervision to mitigate risk for both the institution and the broader financial system?
- Certain risks may be increased in a special purpose national bank because of its concentration in a limited number of business activities. How can the OCC ensure that a special purpose national bank sufficiently mitigates these risks?
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.