Less than one month ago, Brian Brooks assumed the position of Acting Comptroller of the Office of the Comptroller of the Currency (OCC). Upon taking the position, Acting Comptroller Brooks released a statement outlining goals for the OCC during his tenure. Chief among these is promoting innovation in financial services and expanding charter opportunities to encourage and support fintech initiatives and bank and fintech partnerships.
Given the Acting Comptroller's strong credentials in financial services and fintech, his focus and goals for the OCC are not surprising. He is taking the helm of an agency well aware of the importance to innovate along with the industry it regulates and, in many respects, is uniquely qualified to navigate the OCC through the particular challenges of this effort.
Taking Financial Innovation Forward
In his first remarks as Acting Comptroller, Brooks noted that innovation is a "personal passion," and he is looking to build on the OCC's current foundation to provide a "flexible framework and oversight that allows banks to evolve and capitalize on technology and innovation" for delivering products and services, in operations and in risk management.
During Comptroller Brooks' first week at the helm, the OCC issued an advanced notice of proposed rulemaking (ANPR), inviting comment on banking regulations and issues related to digital technology and innovation. While relatively brief, the ANPR raises important threshold questions for the industry regarding the availability and utility of digital technologies and how agency regulations and guidance may be hindering implementation of new technologies.
Among the more pertinent issues and questions raised by the ANPR are the following:
- Whether the OCC's legal standards in 12 CFR Parts 7, Subpart E, and 155 are flexible and clear? Whether the standards should be revised to reflect developments in the industry and, if so, how?
- Do the OCC's legal standards create unnecessary hurdles or burdens to the use of technological advances or innovation?
- Are there digital banking activities or issues related to digital banking activities the OCC does not currently address in their legal standards but that should be included?
- What types of cryptocurrency or cryptoassets activities are financial services companies or bank customers engaged in, and what obstacles in the banking industry do institutions face with adoption of these activities?
- How is distributed ledger technology (e.g., identity verification, credit underwriting and processing, payment processing, trade finance and records management) used or potentially used in banking activities, and is there any further clarification needed in guidance or regulations?
- How is artificial intelligence (AI) and machine learning used or potentially used in banking activities? Are there ways that AI could be used more broadly but is hindered because of regulatory complexity, lack of transparency, audit complexities, or other regulatory barriers?
- What new payment technologies and processes are available and what are the potential implications for use in the banking industry? How are these technologies and processes facilitated or hindered by the existing regulatory framework?
- What new or innovative tools are financial services companies using to comply with applicable regulations and supervisory expectations (e.g., regtech), and how does the OCC's regulatory approach enable or hinder these advancements?
- Are there issues unique to smaller institutions regarding the use and implementation of innovative products, services, or processes?
- Are there other changes to the development and delivery of banking products and services for consumers, businesses, and communities that should be considered?
- Are there issues that should be considered in light of the changes that have occurred in response to COVID-19?
In recent years, the OCC has been a leader among the federal banking agencies in advocating for financial innovation, fintech initiatives, and other financial modernization efforts to support the banking industry it regulates. The OCC ANPR continues this focus on financial services innovation and modernization.
Of particular relevance is the OCC's focus on weeding out regulations and guidance that block or inhibit financial innovation. One important aspect is the development of AI platforms that can handle a wide variety of compliance activities as well as many core banking operations, risk management activities, and other areas of a bank's operations.
A significant obstacle for banks has been getting regulatory and supervisory buy-in for AI platforms that are complex, opaque, and difficult to supervise and examine. Specifically, regulators are concerned about risks that are difficult to identify and measure in connection with a bank's deployment of AI solutions, for example, the potential for bias or discrimination in AI credit underwriting programs. As a consequence, fintech developments in general and AI platforms, in particular have been viewed warily by bank examiners and supervisors. This is an evolution that will take some time to develop, but the OCC ANPR is a step in the right direction.
Perhaps most important in all of this is the ANPR's recognition—and the OCC's reckoning—that the banking regulators themselves must innovate, adapt, and modernize to enable the banking and financial services industry, as well as consumers of financial products and services to reap the benefits and promise of fintech and financial innovation. The OCC ANPR recognizes and embraces this notion and, in so doing, serves as the catalyst for an important dialogue among the various stakeholders in this process.
Focus on the Fintech Charter and Expanding Charter Opportunities
Consistent with the theme of financial innovation and regulatory/supervisory modernization, the Acting Comptroller has also put a very strong emphasis on taking the fintech charter forward and expanding bank charter opportunities for both traditional and nontraditional players in the financial services space. While also focusing on digital innovation for institutions currently under the regulatory scope of the OCC, Comptroller Brooks noted that he is seeking to "specify the parameters of the fintech charter and other special purpose charters" subject to the jurisdiction of the OCC.
In recent years, the OCC has explored and proposed the use of special purpose national bank charters for interested fintech firms. Generally, this would enable these companies to access the nationwide financial system while avoiding a state-by-state licensing regime. However, these efforts have confronted numerous obstacles, not the least of which has been significant opposition and lawsuits by some state regulators challenging the OCC's authority, almost from the time the agency first proposed the fintech charter in 2015.
While Comptroller Brooks indicated that he is committed to tackling the challenges with the expansion of charter opportunities confronting the OCC, many of the issues are not new. Rather, these issues are a carryover from decades of skirmishes between state and federal regulators competing for charters in the context of the fiercely competitive dual banking system. In this regard, the Acting Comptroller's commitment to innovation, charter expansion and modernization, and some things labeled fintech may be severely challenged during his tenure.
The COVID-19 Effect
A final important consideration that could have a significant bearing on Comptroller Brooks' plans for the OCC and the banking industry it regulates is COVID-19. While the OCC is seeking to understand changes and manage risks to the industry amid the situation, we are already seeing the potential promise and risks presented with rapidly changing technologies and innovation. Unclear is what degree of innovation may be too much and how to determine which innovations are proper for a particular bank, industry, or regulator.
In discussing the issue of examination work in light of COVID-19, Comptroller Brooks recently stated, "I'm an evangelist for the use of technology and innovation to improve access and make work and lives easier. But our work is too important to rely solely on a phone, a webcam and a broadband connection."
While bank branches once stood as brick and mortar operations that were the predominant access point for banking services and bank customers, today a significant portion of bank customers rarely, if ever, walk into a branch. Instead, most bank customers now rely on a wide range of financial products and services delivered through a bank's digital operations.
In contrast, while the tools available to regulators to assess safety and soundness, regulatory and legal compliance, risk management, and other areas of a bank's operations have advanced significantly, it is not clear how much has really changed in the manner in which regulators examine and supervise banks. Perhaps this is just the way it is.
Ultimately, however, the most significant challenge for the OCC and other federal and state banking regulators may very well be not how the regulators adapt to fintech and financial innovations in the institutions they regulate, but how the regulators themselves are able to develop and adopt regulatory technologies—"regtech" solutions—in adapting to rapidly evolving changes and innovations in the industry they regulate.
Davis Wright Tremaine attorneys are available to assist you in providing comments to the OCC on questions raised in the ANPR, as well as in connection with other considerations, ideas or suggestions that you would like to raise with the agency or other federal/state banking agencies regarding fintech or regtech innovations or solutions you may be considering. Similarly, we are also available to advise you on various charter options and related considerations that should be taken into account when considering pursuing a bank charter.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
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