The Office of the Comptroller of the Currency (OCC) announced that it will begin accepting special charter applications from non-depository financial services providers. The announcement came in tandem with a Treasury Department report identifying regulatory improvements that could provide better oversight of support nonbank financial institutions, addressing a major point of contention for the banking industry.
In addition to providing more banking options for consumers and businesses, Comptroller of the Currency Joseph Otting said the creation of special nonbank charters could expand opportunities for other companies wanting to enter the banking business. Multiple banking trade organizations previously expressed concerns about such a prospect, citing the potential for an unbalanced competitive playing field in the marketplace stemming from a lack of regulatory oversight for nonbanks.
“The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy,” Otting said in a statement. “The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America. Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”
Although concerns linger, Independent Community Bankers of America (ICBA) President and CEO Rebeca Romero Rainey was among multiple trade leaders to commend the Treasury for its due diligence studying the matter and offering suggestions for modernizing the regulatory regime to account for chartered non-depository entities.
“ICBA commends the Treasury Department for studying the important issues covered in its report on nonbank financial firms and financial technology, which includes recommendations on how policymakers can modernize federal regulations and embrace innovation,” Rainey said in a statement.
Rainey also highlighted her association’s recommendations for how the OCC could work to further ease concerns about the potential market disruption stemming from the issuance of nonbank special charters, including obtaining a congressional go-ahead beforehand, as ICBA has done in the past.
“ICBA remains concerned that instituting a special-purpose national bank charter for fintech firms would create an unlevel regulatory playing field,” she said. “The Office of the Comptroller of the Currency should procure explicit statutory authority from Congress before it issues fintech charters. Any new chartered institution should be subject to the same supervision and regulation required of community banks, including oversight and regulation of parent companies under the Bank Holding Company Act.”
ICBA, as well as other trades, praised the report for also accounting for their recommendations related to data security initiatives, modernizing the Telephone Consumer Protection Act and other laws, harmonizing state licensing requirements and guidance on third-party partnerships, codifying the “valid when made” doctrine and encouraging continued Federal Reserve leadership on payments modernization. The report also recommends the Consumer Financial Protection Bureau drop its payday lending rule, which currently is pending reconsideration at the bureau.
The OCC has the statutory authority to decide what types of institutions to charter as national banks, including those do not take deposits, as defined by the Federal Deposit Insurance Act, and therefore would not require insurance from the Federal Deposit Insurance Corporation. Qualifying fintech companies also may apply for federal charters under the OCC’s authority to charter full-service national banks and other special purpose banks, such as trust banks, banker’s banks and credit card banks.
“Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition,” Otting said. “It also provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.”
Noting the OCC’s stated intention to ensure that special charter recipients “adhere to the same high standards that apply to all national banks,” the American Bankers Association (ABA) expressed support for the agency’s decision.
“On the heels of the Treasury report, we are pleased to see the Office of the Comptroller of the Currency moving forward with their new fintech charter that maintains the strict safety and soundness requirements all banks face today,” ABA President and CEO Rob Nichols said in a statement. “Today’s OCC announcement supports a dynamic banking industry where all players must meet the same high standards, face the same regulatory oversight and share the same affirmative responsibility to serve their communities.”
Nichols pointed out the prospect of banks partnering with startups as a potential opportunity to be excited about.
“In particular, we welcome the flexibility Treasury recommends in allowing banks to partner with financial start-ups to deliver new products through trusted channels and the need for sensitive customer financial data remain protected,” Nichols said. “ABA will carefully review Treasury’s payments recommendations to ensure they reflect the market-based approaches that serve customers so well today. We also want to commend Treasury’s encouragement to regulators to keep pace with the impressive financial innovations reaching consumers every day.”
National Association of Federally-Insured Credit Unions (NAFCU) President and CEO Dan Berger noted his organization’s support for the OCC’s decision and the new Treasury report as well.
“We support the concept of a special-purpose national bank charter for fintech companies," said Berger. "NAFCU believes that fintech companies require a minimum level of regulation and supervision to ensure a level playing field.”
The OCC noted that it consulted with several stakeholders over a two-year period, reviewing public comments solicited after the publication of Exploring Special Purpose National Bank Charters for Fintech Companies in December 2016, and Comptroller’s Licensing Manual Draft Supplement: Evaluating Charter Applications From Financial Technology Companies in March 2017 before making its decision.
The agency issued a policy statement and Comptroller's Licensing Manual Supplement stressing the following regarding the acceptance of special non-depository charters:
- “Every application will be evaluated on its unique facts and circumstances.
- Fintech companies that apply and qualify for, and receive, special purpose national bank charters will be supervised like similarly situated national banks, to include capital, liquidity, and financial inclusion commitments as appropriate. Fintech companies will be expected to submit an acceptable contingency plan to address significant financial stress that could threaten the viability of the bank. The plan would outline strategies for restoring the bank’s financial strength and options for selling, merging or liquidating the bank in the event the recovery strategies are not effective.
- The expectations for promoting financial inclusion will depend on the company’s business model and the types of planned products, services and activities.
- New fintech companies that become special purpose national banks will be subject to heightened supervision initially, similar to other de novo banks.
- The OCC has the authority, expertise, processes, procedures, and resources necessary to supervise fintech companies that become national banks and to unwind a fintech company that becomes a national bank in the event that it fails.”
Former Comptroller Thomas Curry announced in December 2016 that the OCC would consider taking charter applications from fintechs, eliciting a concerned response from the banking industry. The announcement coincided with an OCC whitepaper about fintech regulation, stating that the agency would provide oversight to “help ensure that these companies operate in a safe and sound manner” and “encourage them to explore new ways to promote fair access and financial inclusion and innovate responsibly.” In October 2016, the OCC established its Office of Innovation, tasked with facilitating responsible innovation in the financial marketplace.