OCC head cites efforts to ‘level up’ banking, fintech industries’ powers, oversight; in other words, to modernize the ‘regulatory perimeter’

Acting Comptroller of the Currency Michael Hsu on Wednesday discussed efforts under way to assess the future of financial regulation, with focus on how to “level up” the rights, obligations, and trust value of both banks and financial technology (fintech) firms in ways that safeguard the financial system and consumers.

Put another way, Hsu cited a need to modernize the “regulatory perimeter.”

“Increasingly, the three cornerstones of banking – taking deposits, making loans, and facilitating payments – are being reassembled functionally and digitally outside of the bank regulatory perimeter by certain firms,” Hsu said in a speech at the American Fintech Council’s Fintech Policy Summit 2021. He said such “synthetic banking providers” (SBPs) operate out of the reach of bank regulators and free of bank rules, such as capital requirements, bank consumer protection laws, and the Community Reinvestment Act.

He said the pandemic has hastened such developments. But he pointed out that while fintech advocates “proudly point” to fintechs’ role in facilitating expanded access to Paycheck Protection Program (PPP) in touting their value, more recent evidence “shows higher rates of customer dissatisfaction and of fraud with PPP loans facilitated by fintechs versus those facilitated by traditional banks.” And he said the rapid growth in users in the cryptocurrency space, and total market value, “has only been matched by the growth in scams and consumer complaints.”

In other remarks, however, Hsu pointed out that banks have been slow to adapt to change, leaving groups such as the underbanked, communities of color, rural communities, and small businesses, feeling “poorly served by the banking industry.” Additionally, he said residual distrust from the 2008 financial crisis remains.

He said these conditions have created opportunities for fintechs and crypto firms. And while banks have made considerable improvement in their financial conditions, risk management capabilities, and consumer practices, “notable gaps, mistakes, and bad behaviors remain. I want to be clear: everybody needs to level up, including banks.”

Hsu said efforts here and abroad, including the OCC’s creation of the Office of Innovation, were “broadly motivated by a fear that an inability to bring responsible innovation into the regulatory perimeter would result in widespread irresponsible innovation taking place outside of it.” He said the problem has been sharpened by the pandemic.

Hsu, focused on clarifying a vision for modernization of the banking perimeter, noted the recent conclusion of a review he initiated of OCC bank charter applications and cryptocurrency-related interpretive letters. He said OCC determinations and feedback to bank charter applicants will be communicated in the coming weeks.

He also said the OCC has been working with the Federal Reserve and the FDIC on a “crypto sprint.” This too has concluded, he said, with results to be communicated “shortly.” The content of these communications – on the chartering decisions, interpretive letters, and the crypto sprint – “will be broadly aligned with the vision for the bank regulatory perimeter laid out here today.”

Other efforts include the agency’s increased focus on the banks that provide services to large fintechs and facilitate synthetic banking outside of the bank regulatory perimeter, and effort Hsu said “dovetails” with the CFPB’s recent order seeking data from big tech companies to assess the adequacy of their consumer protections. He said the OCC is also working with the Fed and Federal Deposit Insurance Corp. (FDIC) in reviewing public comments and finalizing the interagency guidance on third party relationships, which includes fintech partnerships; and is “deepening our working relationship” with state regulators.