On July 31, 2018, the Department of the Treasury (the Treasury) released its fourth and final report in response to the Executive Order issued by President Trump in February 2017, identifying laws and regulations that are inconsistent with the Core Principles for financial regulation set forth in that Executive Order (E.O. 13772).1 The report identified improvements to the regulatory landscape and that can better support nonbank financial institutions and fintech firms, in addition to fostering innovation.2

In drafting the report, the Treasury consulted with a wide range of industry participants, focused on consumer financial data aggregation, lending, payments, credit servicing, financial technology and innovation. The report makes more than 80 recommendations to Regulators and Congress encouraging financial innovation within a regulatory environment.3 One of the most striking of these recommendations was an endorsement of the Office of Comptroller of the Currency’s (OCC) plans to create a new Federal Bank Charter for fintech firms, and hours after this endorsement, announced that it would move forward with accepting charter applications (to be explored in greater detail in a future Accenture Regulatory Alert, entitled “Office of Comptroller of the Currency to Create Federal Bank Charter for Fintech Firms”).4 The Treasury recommendations are designed to facilitate innovation by streamlining and refining the regulatory environment. 

What this means 

The Treasury recommendations are specifically designed to:5

  • Embrace the use of consumer financial data and competitive technologies in an efficient and responsive manner  
    • Efficiency – to encourage the use of digital communications, data sharing, cloud computing and machine learning 
    • Responsibility – to set a standard for national data security and breach notification and allow consumers to withdraw prior data authorizations, and so develop more secure data sharing methods 
  • Streamline the regulatory environment and thus encourage innovation and avoid fragmentation across business models
    • Encourage regulators countrywide to harmonize regulations and create a consistent environment for financial institutions and promote innovation 
  • Modernize activity-specific regulations
    • Update regulations to accommodate technological advances, and facilitate partnerships between banks and nonbanks 
    • Digitize the lending and payments processes, to ensure more efficiency 
    • Harmonize the regulatory authority over wealth management and financial planning to reduce costs and encourage the development of digital financial planning services  
  • Facilitate experimentation
    • Establish a system that invites innovations from new and existing market participants, and work with Federal and State regulators to develop “regulatory sandboxes”  
    • Encourage regulator engagement and thus allow financial regulators to keep up with the technological developments emerging from the industries they regulate 

The Treasury in the report took clear positions on a number of controversial issues in addition to the OCC Charter. A large part of their focus was on how financial data is used, aggregated, and secured, and the report noted that by 2020 digitized data will grow more than fortyfold over the 2009 level, and that only 13 states have data security standards for protecting consumers financial information. They explicitly recommend to Congress to “enact a Federal data security and breach notification law” to protect consumers “in a timely manner”.6

Another key recommendation is the creation of “regulatory sandboxes” where financial firms can seek regulatory guidance on the launch of new products and services.The United States lags behind other countries such as the U.K. and Singapore in the development of such sandboxes, as regulators have struggled to create a uniform system because of the fragmented Federal and State regulatory regimes.8 The report stated, “Treasury will work with Federal and State financial regulators to design such a solution in a timely manner,” and “If financial regulators are unable to address these objectives, … Treasury recommends that Congress consider legislation to provide for a single process consistent with the principles set forth … including preemption of state laws….”9

While the report touched on many areas of fintech, it refrained from taking any position on Blockchain and Distributed Ledger technology. Instead it stated that those issues would be “explored separately in an interagency effort” led by the Financial Stability Oversight Council (FSOC). The report also encouraged the Consumer Financial Protection Bureau (CFPB) to rescind its Payday lending rule.10

Conclusion 

Policymakers have struggled to keep up with advancements in fintech and the impact that they are having on financial services. The Treasury report emphasizes that Federal policymakers need to work closely with financial firms and industry advocates to adapt current financial regulations to fintech platforms, and that states need to work together to harmonize rules and help prevent unnecessary regulatory burdens.  

Fintechs such as online lenders, mortgage and loan servicers, and payments platforms make up a growing share of the financial services industry, and the growth of cryptocurrencies has drawn more regulatory attention to fintechs and their implications across the financial services industry. Fintech industry advocates insist they support strong regulation, but in order to continue to innovate they need greater clarity to navigate burdensome, and sometimes conflicting Federal and State laws. Treasury Secretary Steven Mnuchin said in a statement, “American innovation is a cornerstone of a healthy U.S. economy. Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector.”11 “America is a leader in innovation. We must keep pace with industry changes and encourage financial ingenuity to foster the nation’s vibrant financial services and technology sectors.”12

 

 References 

  1. “Treasury Releases Report on Nonbank Financials, FinTech, and Innovation,” U.S. Department of the Treasury, Press release, July 31, 2018. Access at: https://home.treasury.gov/news/press-releases/sm447. 
  2. Ibid 
  3. “Treasury Releases Report on Nonbank Financials, FinTech, and Innovation,” U.S. Department of the Treasury, Press release, July 31, 2018. Access at: https://home.treasury.gov/news/press-releases/sm447. “6 takeaways from Treasury fintech report: National charter, breaches and more,” American Banker, July 31, 2018. Access at: https://www.americanbanker.com/list/5-takeaways-from-treasury-fintech-report-national-charter-breaches-and-more. 
  4. “6 takeaways from Treasury fintech report: National charter, breaches and more,” American Banker, July 31, 2018. Access at: https://www.americanbanker.com/list/5-takeaways-from-treasury-fintech-report-national-charter-breaches-and-more 
  5. “A Financial System That Creates Economic Opportunities – Nonbank Financials, Fintech, and Innovations,” The Department of the Treasury, July 2018. Access at: https://home.treasury.gov/sites/default/files/2018-07/Nonbank%20Financials%20EO%20-%20Fact-Sheet%20FINAL.PDF. 
  6. “6 takeaways from takeaways from Treasury fintech report: National charter, breaches and more,” American Banker, July 31, 2018. Access at: https://www.americanbanker.com/list/5-takeaways-from-treasury-fintech-report-national-charter-breaches-and-more. 
  7. Ibid 
  8. Ibid 
  9. Ibid 
  10. Ibid 
  11. “Treasury highlights ways to bolster financial tech companies,” The Hill, July 31, 2018. Access at: http://thehill.com/policy/finance/399658-treasury-releases-report-on-ways-to-bolster-new-financial-tech. 
  12. Ibid 

Newsletter Author: Venetia WooMairi Bryan
Newsletter Contact Person: Venetia Woo 

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation. 

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