How Treasury could come down on fintech regulation

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WASHINGTON — The Treasury Department is expected to strike a middle path in upcoming recommendations on regulating the fintech sector, laying out how fintech oversight could be incorporated in existing rules without creation of an entirely new regulatory framework, according to sources familiar with the matter.

Treasury is planning to release its report on regulating nonbanks, including fintech firms, as early as this month, these sources said. The last in a series of reports on financial regulation, Treasury's recommendations are expected to cover multiple fintech types, including online lending, as well as partnerships between banks and payments companies.

“There’s a lot in this space and there’s a lot of material that the Treasury can touch on so the challenge will be for them to narrow their list of recommendations,” said Margaret Liu, senior vice president and deputy general counsel at the Conference of State Bank Supervisors.

The report may also touch on the Office of the Comptroller of the Currency's development of a special-purpose fintech charter, the regulation of installment lenders and interagency coordination.

Some observers expect the Treasury to take an even-keeled approach to allowing innovation within the banking system rather than suggesting a completely new regulatory regime, pointing to the past reports in the series in which the Treasury evenly weighed aspects of the regulatory framework that were working with those that unnecessarily add to the industry's burden.

“The reports to date have all been thoughtful considerations of the existing regulatory regime and that outlined tangible policy steps,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading. “The Treasury report is likely to count on both the promise and peril of fintech as the industry continues to evolve.”

But others said the report could include recommendations strongly supported by the industry, including suggestions on rules pertaining to the sale of online loans and IRS data modernization, among other things.

The Treasury report is also likely to touch on the controversy that erupted between state regulators and the OCC over the latter's work on creating a federal charter for fintechs. The charter framework was developed under former Comptroller of the Currency Thomas Curry, but state regulators tried to halt the plan through litigation.

Current Comptroller Joseph Otting has not yet taken a position on chartering fintechs. In recent remarks, Otting said his agency was expecting to announce its decision in July, and that numerous fintech firms have grown less interested in the charter idea the more that they have learned about the costs.

“It’s important to point out how perhaps that market has changed" since the OCC first explored the idea, Otting said in a conference call with reporters last month.

Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, said during a March banking conference that the fintech report would look at “regulatory asymmetries” in order to create an even playing field between nonbanks and banks.

“On the regulatory side, we’ll be making some observations on some rationalizations of [what] federal versus states require,” said Phillips at a conference sponsored by the Institute of International Bankers. “Obviously the OCC has spent some time on a fintech charter idea. Many of these companies are right on the edge of crossing over into banking services, so [determining] where banking begins and ends will definitely be part of our work.”

Phillips is scheduled as a keynote speaker for a fintech conference June 21 that’s hosted by the Securities Industry and Financial Markets Association.

“There has been a considerable amount of jurisdictional uncertainty regarding the fintech space and the forthcoming Treasury report could outline some conceptual thinking,” Boltansky said.

Many observers also said the Treasury will continue to emphasize coordination among regulators, as it has in past reports. The fintech industry, in particular, has long raised concerns about inconsistencies across state laws and lacking a clear regulatory framework at the federal level.

State regulators, through CSBS, have been working on coordinating regulation around fintech and many of the federal financial agencies have launched new offices to handle fintech inquiries.

“It wouldn’t surprise me if the Treasury’s report includes encouraging the agencies to coordinate and collaborate with each other,” said Jo Ann Barefoot, CEO at Barefoot Innovation Group and a co-founder of Hummingbird Regtech. “Treasury has been broadly adopting a spirit of forward leaning and more agency collaboration on regulating fintech.”

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