The Comptroller of the Currency, Thomas Curry, announced that the OCC would commence considering applications from financial technology companies that offer bank products and services for a grant of a special purpose bank charter. The ability to obtain a bank charter would eliminate the need for Fintech companies to register in multiple states, each with different laws and restrictions. Although the details of the charter are not final, the OCC released a paper discussing the issues and conditions that will be considered in granting special purpose bank charters. That paper indicates that such institutions would not be required to take FDIC-insured deposits. In a related Fintech development, Federal Reserve Board Governor Brainard gave a speech at a Federal Reserve Board conference on emerging financial technologies. She addressed various developments and the need to address related risks, and she noted the Federal Reserve Board’s earlier establishment of a working group on fintech innovation.

View the OCC press release.

View the OCC paper.

View Governor Brainard’s speech.
 

In early December 2016, the US Federal Reserve Board’s Divisions of Research & Statistics and Monetary Affairs released a discussion paper entitled “Distributed Ledger Technology in Payments, Clearing, and Settlement.”

The paper notes how digital innovations in finance, loosely known as Fintech, have garnered a great deal of attention across the financial industry. Distributed ledger technology (DLT) is one such innovation that has been cited as a means of transforming payment, clearing and settlement processes, including how funds are transferred and how securities, commodities and derivatives are cleared and settled. The paper examines how this technology might be used in the area of payments, clearing and settlement and to identify both the opportunities and challenges facing its practical implementation and possible long-term adoption. The authors state that DLT has the potential to provide new ways to transfer and record the ownership of digital assets; securely store information; provide for identity management; and other evolving operations through peer-to-peer networking, access to a distributed but common ledger among participants and cryptography. Potential use cases in payments, clearing and settlement include cross-border payments and the post-trade clearing and settlement of securities transactions. These use cases could address operational and financial frictions around existing services.

Read more.

SEC Commissioner Michael S. Piwowar spoke at the SEC’s Financial Technology Forum, calling for the SEC to take “the lead regulatory role” in the FinTech space, noting that the SEC is “uniquely situated” to do so. Piwowar claimed the current regulatory struggle for financial technology firms is not dealing with any specific regulation, but dealing with navigating multiple regulators and possibly contradictory regulation. He stated that the SEC is the ideal regulator for FinTech companies because many financial technology firms are already SEC registrants and the SEC has a unique mandate and capacity to regulate the emerging industry.

View Commissioner Piwowar’s remarks.

The OCC announced it will establish an office dedicated to responsible innovation and implement a formal framework to improve the agency’s ability to identify, understand and respond to financial innovation affecting the federal banking system.

The Office of Innovation will be headed by a Chief Innovation Officer assigned to OCC Headquarters with a small staff located in Washington, New York and San Francisco. The office will be the central point of contact and clearinghouse for requests and information related to innovation. It will also implement other aspects of the OCC’s framework for responsible innovation, which include: (i) establishing an outreach and technical assistance program for banks and nonbanks; (ii) conducting awareness and training activities for OCC staff; (iii) encouraging coordination and facilitation; (iv) establishing an innovation research function; and (v) promoting interagency collaboration.

The OCC expects the office to begin operations in first quarter 2017. To support implementation of the framework, the agency has named Beth Knickerbocker acting Chief Innovation Officer.

View OCC’s Recommendations and Decisions for Implementing a Responsible Innovation Framework.

The US Consumer Financial Protection Bureau released a report highlighting market innovations with the potential for consumer benefits as part of its Project Catalyst, a collaborative effort for the CFPB to research and encourage new or emerging projects that are consumer-friendly. The CFPB highlighted how Project Catalyst has led to the regulator engaging with companies and entrepreneurs that are developing new financial products—the report highlighted how the placing of the CFPB’s “trial disclosure waiver” program and no-action letter policy under the auspices of Project Catalyst has led to the CFPB better supporting innovation.

Read more.

CFPB Director Richard Cordray delivered a speech at Money 20/20, focused on how financial innovation can better serve consumers. Cordray noted that CFPB, as a new agency, feels an affinity towards innovators in finance. Cordray highlighted how FinTech companies and financial institutions are developing products that “cut across” regulatory frameworks and pledged that CFPB will continue to work with companies to encourage innovation, while ensuring laws are complied with—he cited enforcement actions CFPB has taken focused on deceptive conduct, while noting that the agency is not looking to punish actors for “raising novel issues” or questions that fall into “unforeseen cracks in regulatory framework.”

The majority of Cordray’s remarks focused on 2 points: (i) how innovation can facilitate access to financial markets and products to underserved populations and (ii) how technology can help consumers better manage their own finances. He noted that technology is giving customers who remain “locked out” of traditional banking system options beyond an all-cash economy. He also highlighted automatic or motivational tools that help encourage consumers to save and talked about various CFPB policies, including its no-action letter program that allows programs to hold promise for consumers but would be held back by regulatory uncertainty to proceed for a defined period. Cordray concluded that the interests the CFPB and FinTech firms are aligned at a deep level, as they both require a focus on service to consumers.

View Cordray's remarks.
 

As part of remarks delivered at an Institute of International Finance panel on blockchain, US Federal Reserve Board Governor Lael Brainard addressed distributed ledger technology, noting that this technology may represent the most significant development in many years in payments, clearing and settlement. Brainard highlighted the payments system as an important area of oversight, noting that the FRB wants to maintain public confidence in the payments system, while supporting innovation that provides broadly shared benefits to the public over time, including through reduction of unnecessary frictions, costs and delays.

Among other things, Brainard discussed several use cases that the FRB explored in its discussions with industry stakeholders in order to illustrate the potential of distributed ledger technologies, as well as considerations important to the FRB in its assessment of benefits and risks. Regarding risk associated with the use of distributed ledgers, Brainard stated that, “[w]hat matters to us as policymakers and regulators is not only whether the migration to a new technological platform increases or reduces risks, but also whether risks are rendered more or less opaque, and how they are distributed among and between financial intermediaries and end users.”

Brainard noted that going forward, the FRB will deepen its engagement with a range of financial institutions and other stakeholders to refine its understanding of the new technologies, and will focus specifically on is responsibilities for the payments system, as well as its oversight of financial market intermediaries. The FRB expects to publish a research paper later this year that summarizes some key findings from its industry engagement on this topic thus far.

View Governor Brainard's remarks.

Representative Patrick McHenry (R-NC), introduced a bill entitled “Financial Services Innovation Act of 2016,” that would, among other things, establish Financial Services Innovation Offices (FSIOs) at applicable agencies in order to (i) support the development of financial innovations and (ii) establish procedures to streamline the time and cost of financial innovations. In addition, the proposed legislation includes a petition process through which covered persons (i.e., anyone offering financial services innovation products or services that submits a petition to an FSIO) may request a waiver from any regulation by submitting required information, including an alternative compliance strategy.

View full text of the proposed legislation.

The Financial Conduct Authority published a Feedback Statement on its call for input on implementation of future RegTech in the UK. The FCA defines RegTech as a sub-set of FinTech with a focus on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities. The Feedback Statement summarizes industry responses to the FCA’s call for input, outlines the FCA’s approach to RegTech for 2016/17 and the activities it will prioritize.  The FCA intends to increase engagement and collaboration with the RegTech community, noting that it has restricted potential to assist the industry in defining standards and guidelines to provide certainty for firms purchasing new technology capabilities. The FCA aims to improve compliance and reduce the overall costs of regulation by encouraging innovation development and the adoption of new technologies that help and improve the interface between the regulator and regulated firms. 

View the feedback statement.

US Comptroller of the Currency Thomas J. Curry delivered remarks as part of the US OCC’s Forum on Responsible Innovation, highlighting the OCC’s efforts to develop a framework for identifying and evaluating responsible innovation. Comptroller Curry defined a responsible innovation as one that meets the changing needs of consumers, businesses and communities, is consistent with sound risk management and aligns with the company’s business strategy. Within the context of a federal banking system, a responsible innovation is one that would help institutions achieve their public purpose without compromising their safety or soundness. During his remarks, Comptroller Curry made references to the OCC White Paper on responsible innovation that was released in March 2016.

In addition to Comptroller Curry’s remarks, the forum brought together thought leaders from banks, financial technology companies, academia, community and consumer groups and the OCC to discuss developments, opportunities and challenges related to financial innovation. The forum examined questions such as whether financial technology companies and banks could coexist and learn from one another and what the impact of innovation on consumers and communities may be.

View Comptroller Curry’s remarks.

The European Securities and Markets Authority published a discussion paper on how distributed ledger technology (including, for example, "blockchains") applies to the securities markets. ESMA is assessing the risks posed by DLT as well as the benefits and key challenges of DLT for securities markets. ESMA’s paper provides an analysis of the applicable EU regulatory framework, focusing on legislation for post-trading activities, which include the European Market Infrastructure Regulation, the Settlement Finality Directive, and the Central Securities Depositories Regulation. Responses to the discussion paper are invited by September 2, 2016. ESMA will assess the feedback to develop its position on the use of DLT in the securities markets and to assess the need for a regulatory response. 

View the discussion paper. 

US Commodity and Futures Trading Commission Commissioner Christopher Giancarlo discussed the potential of distributed ledger technology, which he called "the biggest technological innovation in the financial services industry and financial market regulation in a generation or more." He noted the potential for distributed ledger technology to reduce dependence on third parties, mitigate centralized systemic risk, and perform margin payments in the event of a counterparty default.  In addition to the operational and transactional advantages that distributed ledger technology could bring to firms, Giancarlo suggested that it could also help financial market regulators in overseeing the broader financial market. As he has done in prior speeches, Giancarlo emphasized that in order for this technology to flourish, regulators must take a “do no harm” approach. He noted that regulations regarding distributed ledger technology are likely years away but suggested five steps for regulators to take to ensure that they “do no harm” to allow for distributed ledger technology innovation. Specifically, he recommended that the CFTC and other regulators designate teams to work collaboratively with FinTech companies, foster a regulatory environment that spurs innovation, participate directly in proof of concepts to ensure they understand the technology, work with innovators to determine how rules and regulations should be adopted, and collaborate globally.

View Commissioner Giancarlo’s speech.

Federal Reserve Board Governor Lael Brainard, in a speech given at the Institute of International Finance Blockchain Roundtable, discussed the key challenges involved in the use of distributed ledger technologies in payment, clearing and settlement. In her comments, Governor Brainard discussed some key concerns inherent in distributed ledger technologies, including the challenge of balancing confidentiality and security of firm and client records with the effort to effectively manage access to transaction records for faster and more efficient clearance and settlement, and stressed the importance of fully understanding how different distributed ledger technologies interoperate with each other and with legacy systems.

View the full text of Governor Brainard’s speech.

The Economic Secretary to the UK Treasury, Harriett Baldwin, gave a speech at the 2016 Innovate Finance Global Summit in London. The Economic Secretary announced certain policies that the UK Government had adopted to support the FinTech sector, including establishing a FinTech panel, the delivery of a support function to set an overarching UK FinTech strategy and establishing ‘FinTech Bridges’ to work with priority global markets to assist UK FinTechs to grow internationally.

View HM Treasury's press release. 

The UK Government launched a consultation on a draft innovation plan for financial services. The innovation plan covers the work of each of the financial services regulators – the Financial Conduct Authority, the Payment Systems Regulator, the Prudential Regulation Authority and the Bank of England – setting out the steps that each regulator has taken or intends to take to adapt to new technologies and disruptive business models to encourage competition and growth and to better utilize technologies to reduce burdens on business and create efficiency savings. The consultation seeks feedback on the UK's regulatory environment for financial services supporting innovation, whether the regulators understand innovation and where new technologies might emerge, if there are any gaps that the regulators should focus on and if there are ways that the regulators could better utilize technologies. Responses are requested by May 6, 2016.

At the American Banker Retail Banking Conference, US Comptroller of the Currency Thomas J. Curry discussed innovation in the financial services industry and its impact on retail bankers, consumers of banking services and regulatory agencies. Comptroller Curry noted that if banks are to remain relevant in a changing world, they have to be able to adapt quickly to changes in technology and business practices. He also noted the importance of regulators being open to such changes but cautioned that regulators do so in a responsible way that does not threaten the safety of the system or the financial well-being of bank customers. The Comptroller also spoke about the OCC’s principles for implementing a regulatory framework to support responsible innovation in the federal banking system.

View Comptroller Curry’s remarks. 

The US Office of the Comptroller of the Currency published a white paper on its vision for responsible innovation in the federal banking system and the eight principles that it will follow in developing a framework to evaluate new financial products and services, including formal outreach to the industry and collaboration with other regulators. The OCC also solicited feedback on how the OCC can facilitate responsible innovation, including what additional tools and resources could assist national banks and federal savings associations with regard to innovation. Comptroller Thomas J. Curry discussed the paper and the OCC's general approach to financial innovation in remarks he gave at Harvard. He discussed the challenges that financial technology companies pose to traditional banks, and how these challenges encourage banks to evolve and improve the products and services they offer to businesses and consumers, but cautioned that banks must do so in a responsible way that is consistent with sound risk management practices. Curry mentioned the possibility of creating a new office dedicated to innovation, and noted the OCC’s commitment to work with banks to identify and understand new technology and help banks manage associated risks and comply with consumer safeguards. Comments on the white paper are due by May 31, 2016. The OCC will host a forum on June 23, 2016, to discuss comments on the white paper and lead a discussion on financial services innovation.

View the OCC's White Paper.

View Comptroller Curry’s speech.

US Securities and Exchange Commission Chair Mary Jo White discussed the importance of strong governance and investor protection in the wake of developments and innovation in technology and financial markets. Specifically, Chair White discussed the importance of pre-IPO companies making accurate disclosures, and in particular the implications and potential consequences of the increase in so-called "unicorns" which are private start-up firms with valuations that exceed $1 billion. White also remarked on the need to protect investors that are investing under new SEC rules for capital raising under the JOBS Act -Regulation D, Regulation A+ and Regulation Crowdfunding - all of which are designed to allow smaller companies to access the capital markets. White noted that implicit in improving investor protection are strong financial controls and corporate governance, topics which are particularly important for private pre-IPO companies particularly as they go public and grow, often exponentially. Tools such as ensuring relevant expertise on boards and implementing investor protections while pre-IPO companies are private can help mitigate against the risks faced by rapidly growing start-ups. Finally, White noted that the SEC is closely monitoring developments and related investor protection issues in digital finance or fintech, namely blockchain technology, automated investment advice (robo-advisors) and online marketplace lending platforms.

View Chair White’s speech. 

US Commodity Futures Trading Commission Commissioner Christopher Giancarlo discussed distributed ledger technology, commonly known as DLT or blockchain and its potential to "revolutionize the world of finance." He noted some of the potential uses of blockchain technology, including increasing settlement efficiency and speed, linking recordkeeping networks, reducing transaction costs and increasing market access. Giancarlo also noted potential opportunities in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis. Citing the collapse of Lehman Brothers, Giancarlo emphasized that blockchain technology could provide regulators better visibility into trading portfolios between counterparties, allowing them to react sooner in the face of financial deterioration. Analogizing the development of blockchain to the inception of the internet, Commissioner Giancarlo called on US regulators to let the private sector lead and to avoid impeding innovation and investment as the technology develops. He advocated for a principles-based approach developed in coordination between US and foreign regulators. Finally, he noted that regulators should revisit existing rules and recordkeeping requirements to be sure that they do not inhibit innovation. With respect to the CFTC specifically, he said his agency will revisit Rule 1.31 - a recordkeeping rule that requires all books and records to be kept in their original form or native file format.

View Commissioner Giancarlo’s speech.

US Comptroller of the Currency Thomas J. Curry delivered remarks before the National Community Reinvestment Coalition, where he addressed how banks are adapting to financial technology changes and the Office of the Comptroller of the Currency’s role in supporting responsible bank innovation. Among other things, Comptroller Curry noted that the OCC will soon publish a paper outlining its views on financial services innovation that will enable the agency to “evaluate innovative products, services, or processes that require regulatory approval and identify potential risks associated with adoption.”

View the Comptroller’s speech.