FinTech Outlook: Five Developing Issues to Watch in 2017
Lee Schneider | January 26, 2017
FinTech investment, innovation, and media attention has grown steadily in recent years, and do not look to abate any time soon.
We’ve tapped friend of EquityZen, and FinTech lawyer, Lee A. Schneider, to opine on FinTech regulatory trends to watch in 2017.
Each new year comes with a sense of excitement and anticipation. Let's wipe the slate clean from last year and focus on five trends FinTech companies and investors should monitor in 2017.
1. OCC FinTech Charter
The Office of the Comptroller of the Currency took a methodical approach to announcing its proposed limited bank charter. In the spring of 2016, OCC issued a white paper on FinTech and responsible innovation. They followed with public statements about FinTech, meetings with FinTech firms and a proposed rulemaking, later finalized, on winding up uninsured banks (that is, those without FDIC insurance, including FinTech firms with a limited charter). Then came the FinTech charter rule proposal in late fall, with the deadline for comment letter on January 15th.
Some key points:
- Eligibility: Firms that engage in banking activities such as lending, deposit-taking and payments would be eligible for the charter.
- Single Regulator: Having the charter likely means a firm is subject to supervision and regulation by one national regulator (the OCC) instead of individual state regulators with differing standards depending on where the firm does business.
- Brokerage Activities? The charter also probably makes the FinTech firm a bank under the Securities Exchange Act of 1934, which opens up the possibility of engaging in certain broker-dealer activities without SEC or FINRA registration.
- Discount Window? A FinTech chartered firm also would become a member of the Federal Reserve System, possibly with access to the discount window, which could make borrowing much easier.
Those last two items bear special attention. Having the FinTech charter may be great for a number of reasons, but if it also means that you can conduct brokerage activities and access the discount window, then that opens up a big, wide world.
2. The Consumer Financial Protection Bureau
When the circuit court ruled that the CFPB was unconstitutional and required that it be reorganized, people started to wonder what would happen to the agency. Statements by the President and the new Congress further call into question where the agency is headed.
Some key points:
- UDAAP: The CFPB's power to go after unfair, deceptive and abusive acts or practices has been a powerful, if somewhat subjective, enforcement tool that may be used less in future.
- Disparate Impact: The CFPB has also gone after racial and other discriminatory practices using a disparate impact theory some consider too broad.
- Rulemaking Priorities: CFPB has Rule proposals on mandatory arbitration provisions and payday lenders.
Each of these areas could see changes in 2017 that reduce enforcement and regulatory burdens on the financial services industry, including FinTech firms.
3. Securities and Exchange Commission.
At its FinTech Forum in November 2016, the SEC sought to show its leadership as a regulator of FinTech. It has the benefit of extensive experience with a diverse array of firms. Brokerage and financial advisory firms, particularly in the realm of trading, have been driving technology forward for many decades. Rulemaking like Regulation ATS, Regulation NMS, the market access rule and Regulation SCI all focus on technology and the changes it had wrought in the way broker-dealers and exchanges conduct their business. Even the granting of exchange status to IEX had technology at its core, as did the tick size pilot.
Some key points:
- Technology Rulemaking: The SEC continues to make rules about the development, implementation and monitoring of technology and systems. For example, the proposed amendments to Regulation ATS would require, among other things, SEC approval prior to the implementation of new trading and other features on an alternative trading system.
- Capital Raising: Crowdfunding and Reg A-plus offerings are highly driven by technology and the SEC continues to be interested in how they aid capital formation.
- Blockchain: With an entire panel devoted to it at the FinTech forum, the SEC is keenly aware of blockchain and its many potential uses. We think blockchain tokens (or coins or whatever you are calling them) represent a new frontier for fundraising and a key area to watch, not just from a corporation finance perspective but also from a trading and "investment" perspective.
With all of its experience evaluating technology and its impacts, and its willingness to experiment, the SEC is a regulator to watch in 2017.
4. Competition from Traditional Players
If predictions about the loosening of regulation come true in 2017, it may give traditional financial services companies more time and resources to devote to creating new technologies. For example, the larger banks have devoted huge technology and personnel resources to Basel III and Dodd Frank compliance since 2008. A rollback by Congress and the President, or at their behest by banking regulators, could reduce these heavy compliance burdens, allowing these resources to spend time on product development and customer experience. And of course they can still think about strategic partnerships and acquisitions.
Everyone's favorite buzzword from 2016, cybersecurity concerns will continue to grow in 2017 in response to all of the issues reported in 2016, not least the DNC hack. Every financial services regulator is thinking about and monitoring these issues. Many have published rulemakings, guidance and standards. The insurance industry has started honing cyber-insurance offerings. Cybersecurity is an issue ripe for a separate post, so stay tuned.
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Lee Schneider is Counsel at Debevoise & Plimpton, where he heads the broker-dealer regulatory practice and also focuses on FinTech issues. Lee is a co-host of the Appetite for Disruption, a FinTech-focused podcast which explores business and regulatory developments and technology trends impacting the industry. Appetite for Disruption is available on iTunes or Stitcher and other podcast platforms.
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