The Comptroller’s Special Purpose Charter Proposal for Fintech: A Way Forward?

December 16, 2016

The Office of the Comptroller of the Currency (OCC), on December 2, 2016, issued a proposal in the form of a white paper (Fintech Proposal) describing a new special purpose national bank charter for Fintech firms.  With less than two months before the Trump Administration comes into office, the Fintech Proposal is best described as opening a discussion on how Fintech businesses may fit within the federally regulated sphere and enjoy the benefits of federal regulation, such as preemption of certain state laws and licensing requirements.  The Fintech Proposal contains a series of questions about the new charter, and the OCC is accepting comments on the proposal until January 15, 2017.

I.     The Proposed Charter

Comptroller of the Currency Thomas Curry introduced the Fintech Proposal in a speech at Georgetown University Law Center, in which he noted that “the number of Fintech companies in the United States and United Kingdom has ballooned to more than 4,000, and in just five years investment in this sector has grown from $1.8 billion to $24 billion worldwide.”[1] Curry stated that the OCC wished to respond to innovation in the financial sector, and that it believed that a special purpose national bank charter could serve Fintech companies.

To date, special purpose charters have been granted principally to trust banks focused on fiduciary activities, and credit card banks limited to a credit card business.  The Fintech Proposal, however, asserts that, under the National Bank Act, “there is no legal limitation on the type of [purpose] for which a national bank charter may be granted, as long as the entity engages in fiduciary activities or in activities that include receiving deposits, paying checks, or lending money.”[2]  “Bank-permissible, technology-based innovations in financial services” – which could cover a broad array of activities – are also activities for which the OCC can grant a charter; the OCC stated that it would “consider on a case-by-case basis the permissibility of a new activity that a company seeking a special purpose charter wishes to conduct.”[3]

As a national banking association, a Fintech firm would be subject to the federal statutes applicable to other national banks, such as lending limits, limits on real estate and securities investments, the Bank Secrecy Act and other anti-money laundering laws, OFAC sanctions requirements, and, where applicable, such as with respect to lending, federal consumer law.  A Fintech national bank would be required to become a member bank in the Federal Reserve System and subscribe for stock in the applicable Federal Reserve Bank in an amount equal to six percent of the bank’s paid-up capital and surplus.  If a Fintech national bank did not accept FDIC-insured deposits, it would not be subject to Community Reinvestment Act, FDIC insolvency proceedings, and other laws applicable only to FDIC-insured institutions.

Special purpose Fintech banks would benefit to the same degree as other national banks from OCC preemption of state law.  The Dodd-Frank Act revised National Bank Act preemption, so that a “state financial consumer law” may be preempted by the OCC only if

  • its application would have a discriminatory effect on national banks in comparison with its effect on state-chartered banks;
  • the state consumer financial law prevents or significantly interferes with the execution by a national bank of its powers (the Barnett standard); or
  • the state law is preempted by a federal consumer financial law other than Dodd-Frank.[4]

OCC preemption, moreover, now extends only to the activities of a national bank itself, but not the activities of a national bank’s subsidiaries.[5]

Among the benefits of federal preemption are the ability of a national bank to export interest rates of its home state nationally without regard to state usury limitations – which would benefit a Fintech firm engaged in lending – and the ability of a national bank to avoid state licensing requirements – which would benefit a Fintech firm engaged in “money transmission” activities broadly understood, including certain digital currency activities.

The OCC clarified that even if certain laws (such as the Community Reinvestment Act) did not apply to a special purpose Fintech bank, the OCC had the ability to impose similar requirements as conditions to receiving a national charter, if it believed the conditions “appropriate based on the risks and business model of the institution.”[6]

II.     OCC Expectations

The Fintech Proposal makes clear that the OCC is not proposing a “bank-lite” approach to Fintech.  The OCC expects any charter proposal to have a comprehensive business plan covering at a minimum three years, and providing “a full description of proposed actions to accomplish the primary functions of the proposed bank.”[7]  The plan should include comprehensive alternative business strategies to address various best-case and worst-case scenarios.  In keeping with its post-Financial Crisis approach to corporate governance, the OCC emphasized the role of a firm’s board of directors, who must have a prominent role in the overall governance framework, actively oversee management, provide “credible challenge,” and exercise independent judgment.

The OCC also emphasized the importance of capital, minimum and ongoing levels of which “need to be commensurate with the risk and complexity of the proposed activities (including on- and off-balance sheet activities).”[8]  Where a Fintech firm’s business activities were principally off-balance sheet, the OCC believed that its minimum capital requirements might not adequately reflect all risks, and would therefore require applicants in such circumstances to propose a minimum level of capital that the proposed bank would meet or exceed at all times.  In this regard, the OCC noted that national trust banks often hold capital that “exceeds the capital requirements for other types of banks.”[9]  The OCC would expect a similarly granular presentation with respect to a proposed Fintech bank’s liquidity, including consideration of planned and unplanned balance sheet changes, varying interest ratio scenarios, and market conditions.

Charter applicants would also be expected to demonstrate a “top-down enterprise wide commitment to understanding and adhering to applicable laws and regulations,” including “appropriate systems and programs to identify, assess, manage and monitor the compliance process,”[10] including policies and procedures, practices, training, internal control and audit.  Of particular importance is a compliance program for anti-money laundering and OFAC sanctions, as well as a consumer compliance program designed to ensure fair treatment of customers.  The risk management system should be risk-based, and consider the nature of the applicant’s business, size, and the diversity and complexity of the risks associated with its operations.

With respect to Fintech firms engaged in lending, the OCC would expect the business plan to include a financial inclusion component, which would cover the following:

  • an identification of, and method for defining, the relevant market, customer base, or community;
  • a description of products and services intended to be offered, marketing and outreach plans, and intended delivery mechanisms;
  • an explanation of how the firm would promote financial inclusion; and
  • full information regarding how the proposed bank’s policies, procedures, and practices are designed to ensure that its products and services were offered on a fair and non-discriminatory basis.[11]

The OCC added that, as with other elements of the business plan, it could require a Fintech bank to obtain approval, or no-objection, before it departed materially from its financial inclusion plans.

In terms of chartering procedure, the OCC indicated that the procedures that apply to other national banks would apply in the case of a special purpose Fintech charter.

III.     Questions for Fintech Firms

The Fintech Proposal includes thirteen questions for public comment.  The questions themselves demonstrate some of the challenges in adapting the existing federal regulatory regime to the variety of businesses that may be engaged in by Fintech firms.  For example, the OCC asks “[w]hat elements should the OCC consider in establishing capital and liquidity requirements” for uninsured special purpose banks that limit the type of assets they hold.[12]  A later question suggests that the answer to that question may not be the same for all Fintech firms – “are there particular products and services . . . such as digital currencies, that may require different approaches to supervision to mitigate risk?”[13]  It is not clear that the current OCC approach to capital for special purpose trust banks, where levels above minimum requirements may be imposed, translates to well to all Fintech firms.  And even if the OCC limited that approach to firms with a monoline lending business, it is not clear that the capital and compliance costs of a national charter would be outweighed by the benefits of federal preemption.

So too, there are three OCC questions about financial inclusion, including the OCC’s requiring a financial inclusion commitment.  Although one of the promises of many Fintech firms is advancing financial inclusion, it is not clear that an uninsured institution that receives no benefits from federal deposit insurance should be required to meet the same community lending standards as an insured national bank.

*          *          *          *          *

Ultimately, it will be up to the Trump Administration as to where the Fintech Proposal goes.  During his campaign, the President-elect made it clear that he believed that the financial industry was overregulated, leading to restrictions on the availability of credit, and so it is reasonable to believe that he will want to put his own stamp on the OCC just as with other regulatory agencies.  The Comptroller of the Currency serves a five-year term, and Comptroller Curry assumed his position in April 2012.  The Fintech Proposal is thus the beginning of a process, and industry comment and advocacy will be important.

If commenters make a persuasive case for regulatory flexibility, under which the particular risks of particular business models can be prudently addressed without hindering those models, the prospects of a national charter as an alternative to Fintech firms affiliating with banks could increase in attractiveness.  Eight years after the Financial Crisis, increasing the number of new charters over the very currently low numbers granted could be beneficial.  As rational decisionmakers, however, Fintech firms will weigh all of the costs and benefits of particular schemes before deciding which regulatory path to pursue.

   [1]   Remarks by Thomas J. Curry, Comptroller of the Currency, Regarding Special Purpose National Bank Charters for Fintech Companies, December 2, 2016.

   [2]   OCC, Exploring Special Purpose National Bank Charters for Fintech Companies (December 2016), at 3-4.

   [3]   Id. at 4.

   [4]   Dodd-Frank Wall Street Reform and Consumer Protection Act, § 1044.

   [5]   Id. § 1045.

   [6]   Fintech Proposal, at 6.

   [7]   Id. at 9.

   [8]   Id.

   [9]   Id. at 10.

[10]   Id. at 11.

[11]   Id. at 12-13.

[12]   Id. at 15.

[13]   Id. at 16.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Arthur Long and James Springer.   

Gibson Dunn’s Financial Institutions Practice Group lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following:

Arthur S. Long – New York (+1 212-351-2426, [email protected])
Carl E. Kennedy – New York (+1 212-351-3951, [email protected])
Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
James O. Springer – Washington, D.C. (+1 202-887-3516, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])

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