How Does A Regulator Balance FinTech Disruption with “Responsible Innovation”?

An important regulatory document with unknown impact on the FinTech space was released last week. Anyone with a stake in FinTech innovation and particularly those eyeing investments in potentially disruptive technologies should pay close attention to the message it conveyed: innovation is great – but responsible innovation that is supported by the right culture that protects both institutions and consumers is key.

The document, entitled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective,” issued by Thomas Curry of the Office of the Comptroller of the Currency (OCC), makes for interesting reading for anyone with a vested interest in the “FinTech” space either as a regulator, investor, or entrepreneur. As you can’t miss these days, the FinTech space is attracting massive investment [PDF] and interest from both inside and outside financial services organizations.

As The Wall Street Journal noted, “The OCC is considered to be the best-positioned of federal banking regulators to bring FinTech firms under the same regulatory regime as banks.” As such, it is noteworthy that they were the regulator to push ahead on this topic so aggressively; had this come from another agency, it would have been less widely discussed among FinTech cognoscenti. And yet despite this prominent role in the US regulatory landscape, Curry is remarkably frank in his comments, admitting that “the rise of financial technology companies … does pose challenges for traditional banks […] and also challenges us.” Perhaps even more extraordinary is his acknowledgement that some “might view us as inhospitable to innovation” which is significant for a regulator of his stature and magnitude to openly admit.

Comptroller Curry then proceeds to articulate his vision for “responsible innovation” that is consistent, compatible, and compliant with risks, soundness, and consumer protection. As the OCC attempts to understand and evaluate the various “innovative products, services, and processes” that they are already encountering or anticipate encountering, the OCC has broken down its approach to these eight guiding principles.

1. Support responsible innovation.
2. Foster an internal culture receptive to responsible innovation.
3. Leverage agency experience and expertise.
4. Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers.
5. Further safe and sound operations through effective risk management.
6. Encourage banks of all sizes to integrate responsible innovation into their strategic planning.
7. Promote ongoing dialogue through formal outreach.
8. Collaborate with other regulators.
    

Among this list of eight, there are a few concepts that are particularly worth review and consideration. First, the emphasis on changing the internal OCC culture around innovation is worth noting. For instance, they discuss the establishment of their Payment Systems Policy Group and write “The agency has taken several steps to foster a more receptive culture and to improve the awareness and knowledge of financial innovations.” The additional emphasis on “expedited decision making” is also key to anyone in the FinTech sector and likely to be applauded all around; uncertainty is a hindrance to all players and the OCC’s promotion of clarification, improved processes, and “better understanding of the regulatory regime” is paramount.

Next, its fifth area of focus around “safe and sound operations through effective risk management” probably surprises nobody –​ as regulators this is among their most visible and obvious roles to play in ensuring a resilient financial services industry. “Banks of all sizes should ensure that effective corporate governance and risk management meet supervisory expectations when considering new products, services, and processes.” The OCC then goes on to cite specific areas on which they have these expectations, including operational risk, cybersecurity, managing third-party relationships, and more.

The eighth and final guiding principle on their list is connected to inter-agency collaboration and cooperation, certainly a sore point for many regulated entities (and indirectly for consumers). This special attention from the OCC should certainly be very welcome all around. Regulated financial institutions do complain about this lack of connectedness and have requested improvements in this area. The fact that the OCC has further highlighted that concern means it will move up the priority list, with the document noting “coordination gives banks greater confidence that regulators who share responsibilities will consider innovative ideas consistently.”

If you care about FinTech, are eyeing innovation and disruption, and feel the industry’s passion about the topics in the OCC’s speech and white paper, remember that the OCC wants to encourage discussion and as such you are encouraged to engage them as they refine and adopt their guidelines and directives. The outcome will hopefully be felt in the FinTech space for a long time to come if this initiative is met with productive and collaborative discussions and idea-sharing.