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Congress Asks: Who Regulates 'Nonbanks'?

As fintechs dive deeper into the lending arena, regulators at the state and federal level have been forced to come to terms with the rapidly changing banking environment as well as decide what's a legally appropriate division of labor.

Charlie Clark, director of the Washington State Department of Financial Institutions, recently testified before the House Financial Services Committee and penned an editorial feature in the American Banker highlighting some of the responsibilities states have when it comes to financial technology oversight. Clark is the chairman of the Conference of State Bank Supervisors (CSBS) non-depository supervisory committee.

According to JD Supra, the “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation” hearing featured testimony from the Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau, United Kingdom’s Financial Conduct Authority and the Securities and Exchange Commission, in addition to the CSBS.

Clark spoke regarding the role state entities have in fintech oversight, noting the CSBS oversees nearly 80% of state-chartered banks, according to his piece also posted to the CSBS website. "Nonbanks," as he described them, can fill some of the roles of traditional institutions, particularly with respect to lending. Clark said, though, the name you give something doesn't always dictate who oversees their operations.

"Regardless of what we call a nonbank entity, our licensing and regulation of it does not change because like every industry we supervise, fintech regulation is activities-based," said Clark. "Whether someone goes to a storefront or uses an app, money transmission is money transmission. Similarly, lending is lending. States don’t regulate a company differently just because it calls itself 'fintech' and operates via a cellphone."

Clark went on to note that perception is only a fraction of what comprises a fintech's essence. Fintechs, however you choose to describe them, generally lend themselves to regulation in existing frameworks, he said. "We look beyond labels and marketing to understand the underlying activity and how it fits within state laws and regulations. And most often, a fintech company’s activities fit squarely within the existing state framework.

He did note, though, sometimes new laws are required to keep up with industry changes.

From Twitter:
HawaiiDFI @HawaiiDFI
"How does technology affect financial services? @CSBSNews Pres & CEO of SRR explains (link: https://soundcloud.com/simply_stated_csbs/6-how-technology-impacts-licensing-and-supervision) soundcloud.com/simply_stated_… @HawaiiDFI"

Prior to Clark's testimony, the CSBS had crafted a "Vision2020" plan to prepare for the eventual reality that non-traditional lenders and other fintechs would permeate the banking landscape. According to that plan: "By 2020, state regulators will adopt an integrated, 50-state licensing and supervisory system, leveraging technology and smart regulatory policy to transform the interaction between industry, regulators and consumers."

However, Beth Knickerbocker of the OCC offered some competing testimony to Clark. She emphasized the role of federal regulators and pointed to her office's role in promoting “responsible innovation,” according to JD Supra.

Knickerbocker referenced the OCC’s efforts regarding "special purpose national bank (SPNB) charters for fintechs" and said those applications come as part of "considerable research and extensive outreach with stakeholders.” However, at this time, no such formal application has been received amid ongoing litigation.

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