Is there a need for a US fintech charter?

Editor's Comment: The implications of further regulations imposed on fintechs have ramifications for everyone. They might not all necessarily be bad.

By Michael McCaw | 14 May 2018

Following years of new regulations, nobody in the financial sector is particularly keen on new rules. Since Dodd Frank and its related slew of regulatory and reporting requirements, the very thought that regulations could become more demanding should send shivers down the spine of anyone working in the market. Not least regulators – who have found themselves overladen not only with the task of creating market frameworks to satisfy a number of politically satisfactory rules but also enforcing them.

So when Joseph Otting, US Comptroller of the Currency since November, announced at a conference in April that he would be reigniting a fintech charter first discussed by his predecessor Thomas Curry, the industry let out a collective, deep, sigh. Worse, they’ll be subject to the same types of rules as banks.

“We haven’t concluded on the position and we welcome people’s feedback," said Otting. “But I would say that if we did allow fintech to be regulated, they would be subject to the same rules and regulations as other banks.”

The idea of a fintech charter is divisive, and has been brought up on numerous occasions. Since Curry first mentioned it, it’s gone through a few iterations, and recently been on hold amid legal challenges from the state regulators who directly license fintech firms, and who have argued that the Office of the Comptroller of the Currency (OCC) would be exceeding its mandate by attempting to force rules on the sector. That issue comes to the nub of the issue.

“We’ve got a very jumbled regulatory system,” says Gary Stern, former head of the Federal Reserve Bank of Minneapolis. “Look at the landscape, the system. It’s not a failure or anything like that, but it’s not always clear who’s in charge of what.”

Regulators in the US have huge remit within their particular sector, but without doubt the lines get blurred at times on who runs what. At the federal level, the Securities and Exchange Commission (SEC) takes care of securities laws, naturally, monitoring and overseeing stock and options exchanges, while the Commodity Futures Trading Commission (CFTC) regulates futures and options markets. While the agencies often work together – domestically they often share information and internationally they’ve worked together on cases, the most famous of which is perhaps the Libor scandal – it’s difficult to tell where remits start and end.

And on certain points they disagree on things, particularly in areas in which the market has evolved dramatically. For instance, for the SEC, cryptocurrencies are without a doubt a security. For the CFTC, they are most probably a commodity. Further, both agencies have been stretched beyond resources, chasing the Dodd Frank Act since it was first published. Both points suggest the need for a fintech charter that empowers an agency with a clear mandate to serve the market.

Many market participants might well baulk at the idea of a federal regulator empowered with a fintech charter, arguing the very nature of technological innovation should be allowed to develop unimpeded. And while there’s credence to that argument, the flipside of the coin suggests regulations can be welcomed. Just ask CFTC chairman, Christopher Giancarlo. Speaking last year on the importance of supporting market liquidity and capital requirements: “The time has come for regulators on both sides of the Atlantic to recalibrate bank capital requirements to better balance systemic risk concerns with healthy economic growth and prosperity.”

That ethos runs though much of Giancarlo’s running of the CFTC. Perhaps if the fintech charter does go ahead, it’ll be directed by a similar mandate. But then it depends who is in charge.

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