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States Stake Claim on Fintech Battleground

Washington is easing financial regulation as a battle rages over the supervision of the fintech wave.

President Donald Trump backs the broadly deregulatory Financial Choice Act, which passed the House of Representatives on June 8. Four days later the Treasury Department issued the first in a series of reports on “core principles,” detailing areas for reform that won’t require legislation.

As the regulatory rollback gets underway, states are in sharp disagreement with Washington-based watchdogs over how to oversee the heady, financial technology sector, known as fintech. The Office of the Comptroller of the Currency — which supervises 1,400 national banks and federally chartered savings institutions — is facing a court challenge from state regulators who say one of its pro-fintech initiatives is illegal.

It’s a flare-up of long-simmering jurisdictional controversies.

The Treasury report calls out a fundamental flaw: “regulatory duplication, overlap, and fragmentation.” In other words, too many regulators. It’s a concern that has prompted proposals such as merging the Commodity Futures Trading Commission and Securities and Exchange Commission, or reshuffling the responsibilities of bank regulators including the OCC, Federal Reserve and Federal Deposit Insurance Corp.

Absent congressional action to consolidate regulators with similar missions, the Treasury Department wants to see them “work together to increase coordination of supervision and examination activities,” as well as “consider coordinating enforcement actions.”

Further complicating financial regulation — and any attempt to overhaul it — is the fact that there are 50 states, each able to charter banks and enforce consumer and investor protections. The states, in their fragmented way, are the principal supervisors of the insurance industry.

As if to stand up for this division of state and federal powers known as federalism, and not be overlooked by those who are Washington-centric, the Conference of State Bank Supervisors is taking aim at the special-purpose fintech charter offered by the OCC.

In a 31-page complaint filed April 26 in the U.S. District Court for the District of Columbia, the CSBS says the OCC’s oversight is limited to “the business of banking,” and that its fintech charter violates the Constitution’s Tenth Amendment, which assigns to the states any powers not delegated to the federal government.

Congress has not specified a nonbank charter for fintech, nor expressed intent to preempt state law, according to the complaint.

The chartering idea grew from what former comptroller Thomas Curry called a “responsible innovation” initiative, or a pathway for entrepreneurs to partner with banks or to potentially become banks themselves, without running afoul of old law that is difficult to apply to new circumstances.

Curry stated a desire to keep the U.S. competitive in a global fintech environment marked by the rise of China-based giants, including Ant Financial Services Group and three others in the top five of KPMG’s 2016 FinTech 100. U.S. firms are also up against explicit government support of fintech experimentation in Australia, Singapore, and the U.K.

The battle is unfolding amid a changing of the guard.

Curry left office on May 5, with Keith Noreika acting as comptroller pending Senate confirmation of nominee Joseph Otting. Otting was CEO of OneWest Bank when Treasury Secretary Steven Mnuchin was its chairman.

At odds are perceptions of innovation. CSBS President and CEO John Ryan said in an April announcement of the group’s complaint that state regulators already oversee a “vibrant financial services marketplace,” supervising 75 percent of U.S. banks, as well as nonbank mortgage, money transmission, and consumer finance companies. He said the regulatory structure has produced a “robust platform for innovation.”

Curry, meanwhile, sees outreach and technical assistance from the OCC providing a needed boost to innovation.

The outcome may turn on whether the nonbank fintechs fit the “business of banking” definition.

“The business of banking is dynamic, and I would urge caution to anyone who wants to define banking as a static state,” Curry said in an April speech.

Mercatus Center senior research fellow Brian Knight, blogging about the CSBS case at, says the court will have its say one way or another, “but in the court of public opinion (and policy), it is often as important to convince people that your vision of the world is better.”

Social Finance, the online lender known as SoFi, didn’t wait for a resolution. In June the company filed to form an FDIC-insured industrial loan company in Utah – chalking one up for a state-chartered alternative. Quick to oppose the application was the Independent Community Bankers of America, which also denounced the fintech charter.

A court decision will not please everyone, or fix the fragmentation problem, but neither will it impede technology’s progress.

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