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This action by the OCC follows closely on the heels of the introduction of the “Financial Services Innovation Act of 2016” (“FSIA”) by Representative Patrick McHenry, which is intended to encourage the development of financial products and services by FinTech innovators and mandates that each federal banking agency establish a Financial Services Innovation Office. The OCC’s guidance is also intended to address some of the concerns raised by commenters to the OCCs’ white paper, published in March 2016, which established eight principles for developing a framework for evaluation of FinTech products and services. These include supporting responsible innovation, encouraging responsible innovation that provides fair access to financial services and fair treatment of consumers and collaborating with other regulators.
Innovation Framework Development Team Recommendations
Office of Innovation
An Office of Innovation (the “Office”) will be established to serve as a central point of contact and facilitate responses to inquiries and requests for interpretation of regulations by financial institutions and FinTech companies. It will also conduct outreach and provide technical assistance and collaborate with domestic and international regulators. The Office will report directly to the Comptroller. The Office will consist of a Chief Innovation Officer, an Innovation Technician and other Innovation Officers and Innovation Fellows. The use of Innovation Fellows is intended to enable the Office to leverage the experience and knowledge of academics, consumer and community activists and the private sector and share and transfer OCC knowledge on regulation and supervision to the Fellows. A Responsible Innovation Committee consisting of Deputy Comptrollers and Directors of OCC business units will be established to advise the Office and promote collaboration across agency business units.
Outreach and Technical Assistance Program
A robust program will be established for outreach and technical assistance related to innovation. The OCC recognized that while the outreach strategy can leverage existing avenues for banks, the community and consumer groups, a formal outreach program for nonbanks needs to be developed. The outreach program would include a periodic Responsible Innovation Forum as well as organized innovation workshops and roundtables on specific topics. A dedicated web page would also be developed to provide resource materials and technical information and to solicit feedback on innovation issues. Through the program, the Office would offer technical assistance, resource materials on regulatory principles, processes and expectations, to banks and FinTech companies, and would design “rules of the road” for nonbank companies.
Conduct Awareness and Training Activities
In order to increase awareness of regulatory challenges facing FinTech companies and financial institutions, the OCC will establish an Innovation Networking Group and create other means to promote awareness of industry innovations among its staff. The OCC will develop a process to review and update training programs in response to industry trends and to address new products and services.
Encourage Coordination and Facilitation
The OCC noted that a number of commenters to its white paper stated that regulatory uncertainty, lack of transparency and inconsistency in the decision-making process deter innovation. The Innovation Framework Development Team recommended that the OCC establish specific process steps with timeframes and responsible parties for innovation inquiries and requests for regulatory interpretation, including:
Promote Interagency Collaboration
The OCC will leverage its existing cooperative efforts with other domestic and foreign regulatory agencies to discuss innovation in the industry, share information to increase knowledge, develop consistent approaches and provide a clear message to the industry.
A Continuing Evolution
Over the last several years a large and growing number of FinTech companies have emerged to provide financial products and services through alternative platforms and delivery channels. These companies engage in the traditional banking functions of consumer lending (e.g., Lending Club, Prosper), payments (e.g., Apple Pay) and wealth management (e.g., Betterment). They are leveraging new technologies and processes such as cloud computing, application programming interfaces, distributed ledgers (blockchain), artificial intelligence and big data analytics. In addition, banks are increasingly collaborating with, providing venture funding to, and in some cases acquiring, FinTech companies as the banks recognize the value and efficiency of the FinTech companies’ innovations and product offerings.
The OCC Innovation Framework Development Team’s recommendations are only the first step towards comprehensive regulatory guidance for FinTech companies and financial institutions. As the recommendations are implemented and additional guidance is issued, the tradeoff for certainty and transparency for FinTech companies and financial institutions will likely be increased regulatory scrutiny, risk-management obligations and compliance programs.
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.
If you have any questions regarding this alert, please contact Steven Dunlevie at 404.888.7401 or SDunlevie@wcsr.com, Richard Garabedian at 202.857.4577 or RGarabedian@wcsr.com, or Adam Wheeler at 202.857.4519 or AWheeler@wcsr.com.