In its fourth report to the President, prepared pursuant to the February 2017 Executive Order 13772 establishing core principles for regulatory improvements, the U.S. Treasury Department ("Treasury") made a series of recommendations concerning nonbank financial institutions, FinTech and financial innovation. (See Fact Sheet on the report).

Treasury provided recommendations in four major areas: (i) digitization and consumer financial data, (ii) changing the regulatory framework to foster innovation, (iii) updating activity-specific regulations and (iv) changing the policy environment to support innovation.

Specific recommendations included:

  • Establishment of a federal cybersecurity and data breach notification standard for consumer financial data to replace the current system of differing and inconsistent state data and security breach laws.
  • Improved collaboration between financial regulators and the private sector to adopt trustworthy digital legal identity products and services in the financial services sector.
  • Implementation of a U.S. government-federated digital identity infrastructure and identity solutions that comply with national Institute of Standards and Technology guidelines.
  • Avoidance of unnecessary regulatory burdens or obstacles to the use of artificial intelligence (AI) and machine learning.
  • Support for state regulators' efforts to develop a more uniform licensing regime and supervisory process across all states.
  • Review by federal banking regulators of current third-party guidance, and the harmonization of guidance, with a greater emphasis on improving the oversight of third-party vendors and establishing innovations in a safe but prudent manner.
  • Establishment of a "regulatory sandbox" to coordinate and expedite regulatory relief to permit experimentation with innovative products, services, and processes.
  • Rescission of the Consumer Financial Protection Bureau's "Payday Rule," and the exploration of new avenues for traditional lenders to make small, short-term loans.

In a related policy effort on nonbank financial institutions, the Office of the Comptroller of the Currency ("OCC") will begin accepting applications for national bank charters from non-depository FinTech companies. According to a new OCC policy, FinTech companies that apply and ultimately receive national bank charters will be supervised similarly to other national banks, and they will be expected to submit contingency plans in the event of financial stresses.

Commentary / Steven Lofchie

The most notable aspect of the report was its sheer enthusiasm for the potential benefits of innovation and the determination that potentially outmoded or inconsistent regulations must be amended to facilitate innovation. The report seemed almost gleeful that the Dodd-Frank Act "mandated the adoption of hundreds of new regulations [which] made certain product segments unprofitable for banks, thereby driving activity outside of the banking sector and creating opportunities for emerging nonbank financial firms" (at 4-5). In this regard, it is remarkable to compare the tone of this report, which describes nonbanks as potentially offering better and cheaper services to consumers, with a recent report by the New York Department of Financial Services on marketplace lending, which leaves the reader with the impression that the lenders are essentially internet pirates, and that the government should effectively act to push lending activities back into more traditional, and more heavily regulated banks. (See DFS Report Indicates Increased Level of Online Lending in New York.)

The report is chock full of recommendations (harmonization of state laws, criticism of the Madden decision on the application of usury laws) sure to please new financial firms, and even some recommendations to the benefit of traditional firms (updating SEC Rule 17a-4 regarding recordkeeping on WORM technology).

Commentary / Joseph V. Moreno

In the over six dozen recommendations contained in the report, among the most notable were calls for (i) a national cybersecurity standard, (ii) the development of a "regulatory sandbox" to encourage innovation by providing specified regulatory relief, and (iii) the repeal of the CFPB's payday rule. Treasury also expressed its support for special purpose charter applications for FinTech firms.

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