OCC: Modernize the banking regulatory perimeter on Bank-Fintech – Technology partnerships

United States: OCC: Modernize the banking regulatory perimeter on Bank-Fintech partnerships

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Based on his remarks to the Blockchain Association and the American Fintech Council earlier this month, the Acting Comptroller of the Currency Michael J. Hsu released a statement on November 16 to the Fifth Annual Fintech Conference from the Federal Reserve Bank of Philadelphia (we discussed the previous remarks in a previous Consumer Finance & FinTech blog post here). As in his previous statement, Hsu points out that the rapidly growing FinTech industry and crypto companies, which currently lie outside the so-called banking regulatory perimeter, should be proactively regulated and supervised in order to avoid a another 2008-type financial crisis. In particular, Hsu calls for the regulation of non-banks and fintechs that “apparently provide the full range of banking and investment services, including in cryptocurrencies, with the convenience of the technology”. Hsu states that “[t]These fintechs bring together the three pillars of banking [by taking deposits,
making loans, and facilitating payments] synthetically, outside the banking regulatory perimeter “or what he qualifies as” synthetic bank “.

In its statement, Hsu also specifies that the regulatory scope must take into account not only the activities, but also the nature of bank-FinTech partnerships “which allow fintechs to offer banking services to customers” where “customers are often unable to. distinguish between providers “. “Hsu says that” for some, these partnerships are just ‘charter rental’ agreements, which allow fintechs to bypass a multitude of rules at the expense of customer protection, safety and soundness. banks. ” Thus, Hsu states “that modernizing the banking regulatory perimeter cannot be accomplished by simply defining the activities that constitute ‘doing banking’, but will also likely require determining what is acceptable in a bank-fintech relationship.”

Put into practice : This week’s remarks continue to point to increased regulatory oversight of banking-FinTech partnerships. A bank considering a FinTech partnership should be aware of the in-depth due diligence that regulators expect from a bank before initiating a FinTech, as well as the number of risks such a partnership poses to the bank. At a minimum, regulators may wish to verify that banks (i) have conducted an assessment to identify the risks inherent in the proposed activity and developed a plan to manage those risks; and (ii) ensured that each FinTech they seek to engage has maintained the operational capacity, required infrastructure, financial viability, demonstrated commitment to regulatory compliance and subject matter expertise to deliver the outsourced banking services envisaged under the partnership.

Likewise, a FinTech firm seeking to partner with a bank should ensure that it has the risk-oriented policies, procedures, programs and regulatory information that banks and regulators expect it to prepare. and maintain. As the regulatory framework continues to take shape for synthetic banking services, in the meantime, banks and FinTechs should not lose sight of their regulatory obligations (we discussed the increased focus on fintech partnerships in a previous Consumer Finance & FinTech blog post here).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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