United States: OCC To Charter FinTech Banks, Solicits Comments

Taking another step in its responsible innovation initiative, the Office of the Comptroller of the Currency (the "OCC") recently announced that it will consider granting special purpose national bank charters to FinTech companies and is soliciting public comment on a number of questions. The comment period closes on January 15, 2017.

Chartering Authority

The OCC has precedential authority to charter a limited purpose national bank as long as it conducts one of the three main core banking functions: (1) receiving deposits, (2) paying checks (and modern equivalents such as debit cards, electronic payment processing and digital currency) or (3) lending money. The OCC has relied on this authority to charter two types of limited purpose banks: trust banks and credit card banks.

Reasons for Charter

The OCC contends that a federal charter is in the public interest, noting that FinTech companies have the potential to empower consumers and assist families and businesses to take more control of their financial matters; that there are more than 4,000 FinTech companies in the United States and the United Kingdom alone; and that investment in this sector has grown from $1.8 billion to $24 billion worldwide in the past five years.

The OCC cited three primary reasons for its decision. First, applying a bank regulatory framework to FinTech companies will help ensure that they operate in a safe and sound manner as they explore new ways to serve the needs of customers, businesses and communities. Second, applying the OCC's uniform supervisory structure will promote consistency in the application of law and regulation and ensure fair access to and inclusion of consumers. Third, providing a path for FinTech companies to become national banks can make the federal banking system stronger by subjecting them to OCC examination and oversight and encouraging responsible innovation.

Benefit of National Bank Charter

The primary benefit of a national bank charter is the federal preemption of state licensing and examination requirements and other state laws that prevent or significantly interfere with the exercise of a bank's powers. For the large number of FinTech companies that operate or will operate in multiple states, the elimination of varied and inconsistent state licensing requirements and examination procedures may prove to be an attractive tradeoff for being subject to the OCC's regulatory, compliance, safety and soundness regimen. In addition, national bank chartered FinTech companies may experience greater access to capital and to an expanded base of financial institution customers as investors and financial institutions may be more likely to invest in or do business with a regulated entity.

Baseline Supervisory Expectations

The OCC stated that it would hold a FinTech national bank to the same rigorous standards of safety and soundness, fair access and fair treatment of customers that apply to all national banks and federal savings associations, but that it would account for differences in business models and applicability of certain laws. The OCC identified a number of baseline supervisory expectations for any entity seeking a national bank charter.

Robust, well developed business plan. The business plan is a key component of any charter proposal and should reflect comprehensive, in-depth planning by the organizers, the Board of Directors and management. The business plan should, among other things, clearly articulate why the company is seeking a national bank charter, address strategic, operational, capitalization and financial initiatives covering at least a three year time period, and provide alternative business strategies to address various best and worst case scenarios.

Governance Structure. The governance structure must be commensurate with the risk and complexity of the proposed products, services and activities, as is the case for any de novo national bank. The OCC noted that board members must actively oversee management and exercise independent judgment. Specifically, the board and management must have the expertise, financial acumen and risk management framework to satisfy the OCC's safety and soundness requirements.

Compliance Risk Management. An applicant for a FinTech national bank charter would be expected to demonstrate a culture of compliance that includes a top-down enterprise-wide commitment to understanding and adhering to applicable laws and OCC supervisory guidance. In particular, the OCC noted that it would require (1) a compliance program designed to ensure and monitor compliance with the requirements imposed by the BSA, other AML statutes and regulations and OFAC economic sanctions obligations and (2) a consumer compliance program designed to ensure fair treatment of customers and fair access to financial services as well as compliance with the FTC Act, the unfair, deceptive or abusive acts or practices prohibitions of Dodd-Frank and all other applicable consumer financial protection laws.

Financial Inclusion. The OCC noted its statutory mission includes ensuring that national banks treat customers fairly and provide fair access to financial services. This mission is advanced, in part, by the Community Reinvestment Act. A FinTech national bank would not be subject to the CRA unless its proposed business activitiy includes accepting deposits. The OCC would, however, expect a FinTech national bank that engages in lending activities to demonstrate a commitment to financial inclusion that supports fair access and fair treatment of customers.

Recovery and Exit Strategies, Resolution Plan and Authority. The OCC expects a proposed FinTech national bank's business plan to include alternative business strategies and recovery strategies to address various best and worst-case scenarios. The business plan should also articulate specific financial or other risk triggers that would prompt the FinTech national bank to unwind the operations in an organized manner. The OCC may also require the business plan to include a clear exit strategy.

Chartering Process

The OCC generally intends to follow its established chartering process for FinTech companies seeking a national bank charter. The Comptroller has requested that OCC staff develop and implement a formal agency policy for evaluating applications for FinTech charters. The policy will articulate specific criteria for approval as well as issues that the OCC should consider and conditions that should be met before granting such charters. Any FinTech company seeking a national bank charter will need to familiarize itself with the chartering process and engage experienced advisors to assist in the process. The OCC recognizes that it may need to tailor some of the requirements that apply to full service banks to address the business model of a special purpose national bank. In addition, the chartering process will likely undergo adjustments as the OCC gains experience processing early charter applications.

Public Comment

The OCC is seeking public comment in a number of areas, including:

  1.                What are the public policy benefits and the risks of approving FinTech companies to operate under a national bank charter?
  2.                Should the OCC seek a financial inclusion commitment from an uninsured special purpose national bank that would not engage in lending, and if so, how could such a bank demonstrate a commitment to financial inclusion?
  3.                How could a special purpose national bank that is not engaged in providing banking services to the public support financial inclusion?
  4.                What are the potential challenges in executing or adapting a FinTech business model to meet regulatory expectations, and what specific conditions governing the activities of special purpose national banks should the OCC consider?
  5.                What actions should the OCC take to ensure special purpose national banks operate in a safe and sound manner and in the public interest?
  6.                Would a FinTech special purpose national bank have any competitive advantages over full-service banks that the OCC should address? Are there risks to full-service banks from FinTech companies that do not have bank charters?
  7.                Are there particular products or services offered by FinTech companies, such as digital currencies, that may require different approaches to supervision to mitigate risk for both the institution and the broader financial system?
  8.                Certain risks may be increased in a special purpose national bank because of its concentration in a limited number of business activities. How can the OCC ensure that a special purpose national bank sufficiently mitigates these risks?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.