United States: OCC & NYDFS Battle To Regulate FinTech

Last Updated: July 20 2017
Article by Jeffrey Alberts and Ingrid He

In a recent article published in Bloomberg BNA, Jeffrey Alberts, Co-Chair of Pryor Cashman's FinTech and Financial Institutions Groups, and Ingrid He explored the ongoing battle between the Office of the Comptroller of Currency (OCC) and the New York Department of Financial Services (DFS) for regulatory control of FinTech companies. Excerpts from the article are published below.

OCC vs. DFS: Battle for the Future of FinTech

In the rapidly developing world of financial technology it often is unclear who has the legal authority to regulate the activities of newly created companies. Right now, a major battle is under way between state and federal regulators who are competing to draft and enforce the rules that will guide the future development of the FinTech industry. This battle recently has spilled out from behind the closed doors of bureaucratic negotiation into open public attacks and lawsuits, creating even greater uncertainty amongst FinTech companies about their future regulatory obligations.

State Regulators Want to Regulate FinTech

To understand what brought these regulators, who usually strive to appear cooperative in the eyes of the public, to openly attack one another, it is necessary to look at how state and federal regulators have responded to developments in the FinTech industry. Over the past several years, state regulators have been staking out positions as leading regulators of FinTech companies.For example, in June 2015, DFS promulgated rules for the licensing of virtual currency companies, which the DFS itself dubbed "BitLicenses." Other state regulators, such as the Washington State Department of Financial Institutions, the Texas Department of Banking and the Connecticut Banking Department have instituted, or been granted authority to promulgate, similar regulations.

OCC Issues FinTech White Paper

During this same period, federal regulators have announced the intention to assert control over the regulation of FinTech companies. The argument for federal regulation was advanced in its most compelling form in December 2016, when the OCC published a white paper announcing that the OCC was considering granting special purpose national bank (SPNB) charters to FinTech companies. The OCC framed its goal in proposing these "FinTech Charters" as keeping up with the innovative technologies in the financial sector and responding to the rise of "technology-driven nonbank companies offering a new approach to products and services."

In response to concerns from traditional banks that certain companies receiving FinTech Charters would not be depository institutions subject to the FDIC's regulations, resulting in these FinTech companies receiving an unfairly lower regulatory burden, the OCC indicated that while it is true that in some cases an "SPNB that does not take deposits will not be subject to certain requirements that apply only to insured depository institutions . . . [t]he OCC has the authority to impose special conditions requiring the applicant to comply with standards that generally apply only to insured banks."

DFS's Public Criticism of the OCC

While industry insiders had predicted the possibility of inconsistency, or even tension, between the OCC and the DFS, most assumed that this would be worked out behind closed doors. From its first response to the OCC's FinTech White Paper, however, the DFS made clear that it was willing to take its gloves off to defend its jurisdiction over FinTech companies.

In the DFS's comment letter on the OCC's proposal, DFS Superintendent Vullo did not limit herself to making policy arguments about how national regulation can interfere with state regulatory experimentation or with the ability of state regulators to respond to unique demands of businesses in their jurisdiction. Rather, Superintendent Vullo directly attacked the OCC itself. For example, she concluded her letter by stating that "the proposed 'fintech' charter substitutes an effort to appear innovative for a complicated, problematic new regulatory regime."

Perhaps most shockingly, Superintendent Vullo suggested that the OCC's ineptitude as a regulator permitted HSBC Bank US to engage in the money laundering transactions that resulted in HSBC being fined $1.9 billion in 2012. She noted that "HSBC Bank US was chartered by NY DFS until June 2004 when it became regulated by the OCC" and further noted that at the time HSBC obtained an OCC charter, "HSBC was under a Written Agreement with the NY DFS . . . due to shortcomings in its BSA/AML program."

The Lawsuit

The DFS did not limit itself to criticizing the proposed FinTech Charters. On May 12, 2017, the DFS filed a lawsuit against the OCC in the District Court for the Southern District of New York, alleging that the OCC's proposed FinTech Charters exceeded the agency's statutory authority under the National Banking Act and violated the Tenth Amendment. Based on these claims, the DFS sought declaratory and injunctive relief that would declare the proposed FinTech Charters to be unlawful and prohibit the OCC from creating or issuing these charters in the absence of express authorization from Congress.

As in the DFS's previous attacks on the OCC's proposal, the filed Complaint did not pull any punches. In the Complaint, the DFS described the OCC's decision to issue FinTech Charters as "lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State," further noting that it "puts New York financial consumers – and often the most vulnerable ones – at great risk of exploitation by federally-chartered entities improperly insulated from New York law."

This litigation is pending, and the OCC has not yet filed an Answer to the Complaint.

Where Things Stand for FinTech Companies

While streamlining and clarifying the regulatory framework may have been the OCC's goal, in some ways the regulatory landscape has become more confusing for FinTech companies.

First, as the DFS asserts in the pending lawsuit, it is questionable whether the OCC has statutory authority to issue SPNB charters to nontraditional banks. If the DFS prevails in its lawsuit, then the OCC may never issue SPNB charters to FinTech companies.

Second, regardless of the ultimate outcome of the DFS's lawsuit against the OCC, there will still be no clarity on the proposal while the lawsuit is pending. The current lawsuit may not be resolved before the district court this year, and appellate litigation could further delay the ultimate resolution of this issue.

Third, even if the OCC prevails and begins granting FinTech Charters, state agencies such as the DFS will still attempt to regulate FinTech companies. This could lead to future disputes over the nature and scope of the federal preemption of state regulations, which will add to the confusion over which regulations apply to which FinTech companies.

While these guidelines have relatively well-defined meanings for traditional banks, it is much less clear how regulators will apply requirements such as adequate capitalization and sufficiently detailed profitability milestones to FinTech companies, many of which are relatively small start-ups. As a result of these issues, FinTech companies have little idea what the future regulatory terrain will look like. This uncertainty makes it difficult for companies to predict the future regulatory cost of business decisions they would like to make today. It also concerns investors, who are worried that regulatory burdens could severely impact the profitability of FinTech companies.

For now, those in the FinTech industry are hoping that state and federal regulators will resolve their differences and clarify the regulations that will apply to FinTech companies. Until then, regulatory uncertainty will continue to impede the growth of FinTech companies in the United States.

Read the Full Article

The full Bloomberg BNA article can be viewed here.  

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
Jeffrey Alberts
Events from this Firm
18 Oct 2017, Conference, New York, United States

Interlaw’s 2017 Annual Global Meeting will focus on the future of law, and features speakers who will facilitate discussions around the “new normal” in our workplace where change is happening at an unprecedented pace.

24 Oct 2017, Seminar, New York, United States

On October 24, 2017, Partner Dyan Finguerra-DuCharme will be a featured speaker at a special "Lunch and Learn" session hosted by CompuMark, where she will discuss the challenges of protecting product packaging and design.

26 Oct 2017, Workshop, San Antonio, United States

On October 26, 2017, Bradley Kaufman, head of Pryor Cashman's Commercial + Retail Leasing practice, will be a featured speaker at The International Council of ShoppingCenters's (ICSC) Workshop 22 event.

 
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.