On December 2nd at the Georgetown University Law Center Comptroller of the Currency Thomas J. Curry announced that the OCC had made the determination to consider applications for special purpose national bank charters filed by financial technology companies. Comptroller Curry stated that “the OCC will move forward with chartering financial technology companies that offer bank products and services and meet our high standards and chartering requirements”.
Special purpose charters are limited charters, originally designed for companies such as credit card and trust companies. Their issuance has essentially been on hold since the financial crisis in 2008. In response to mounting pressures from fintech companies which are becoming increasingly disenchanted with navigating the foggy maze of state regulations, the OCC has decided to bring the limited purpose charter out of mothballs. Comptroller Curry cites the significant increase both in number and economic sway of fintech companies in the US and UK, implying the inevitability that these companies will eventually be bought under the financial regulatory umbrella. He reports the number of fintech companies as growing to 4,000 and the rise in investment in such companies from $1.8 billion to $24 billion in just the last five years. He does not define what a fintech company is as there is no general definition and the number and variety is anything but limited. Presumably, those companies choosing to operate as a bank with all the advantages and responsibilities will make that decision and trust the OCC will consider them eligible for a limited charter. He stated that the OCC will evaluate such applications to ensure that the resulting bank will have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity. In connection with this announcement, the OCC issued a white paper describing its legal authority for this step and describing the issues and conditions which the OCC will consider in the granting of such special purpose charters. The paper makes it clear that if the OCC decides to grant a special purpose charter, the specific company (now bank) will be held to the same safety and soundness, fair access and fair treatment of customers standards that all OCC chartered institutions are held to. It should be recognized that the OCC’s position is that it has the ability, through the approval process, to impose requirements that might not otherwise be statutorily applicable to an applicant if it determines them to be necessary. Comments on the white paper must be submitted to the OCC by January 15, 2017.
A copy of the OCC press release, Comptroller Curry’s remarks and white paper may be found here
The Comptroller’s announcement and the issuance of the white paper seem to reflect the OCC’s view that this is a natural step in the evolution of the banking and fintech industries and their inevitable convergence in multiple areas. Whether this is the case will not be resolved soon. The white paper by no means signals where this process will end. up. There are many competing forces in play, not the least of which is the reaction of traditional community banks who fear unfair competition and state regulators who fear federal preemption of their authority. In sounding an alarm, the ICBA, representing community bankers, announced that it is far from sanguine about the proposal. Similarly, the New York Department of Financial Services quickly issued a strongly worded statement opposing the OCC’s action decrying the potential impact on the state’s regulatory prerogatives . In addition to the OCC, there are other federal laws, regulations and agencies (FRB, FinCEN, CFPB, FDIC, etc.) which may affect a fintech bank and need to be considered by any fintech company considering a special purpose bank charter. A fintech company considering applying to the OCC will need to address the OCC’s baseline supervisory expectations; detailed business plan, governance, capital, liquidity, compliance risk management, financial inclusion, and recovery and resolution planning.
It is not clear where the OCC’s initiative will lead, or when it will be completed, especially in light of a new administration and a new Comptroller in early 2017. While banks and fintech companies will be evaluating the contours of the Comptroller’s announcement, there is no assurance that there will be any takers when the details are fleshed out. Clearly, compliance with the maze of financial service laws of 50 states is becoming a barrier to entry for small startup fintech companies The carrot of federal preemption of this maze is very appealing but must be weighed against the assumption of new regulatory responsibilities that surely will continue to evolve if not lag behind further technological innovations. Moores law may have a velocity simply too high for the cumbersome regulatory system to keep up with. This could be a curse or blessing for fintech companies operating as special purpose banks.
Both banks and fintech companies would be well advised to consult with counsel and other knowledgeable professionals prior to drawing any conclusions based on the Comptroller’s announcement of December 2nd and where the discussion regarding special purpose national bank charters is today.