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House Financial Services Committee Fintech Task Force Hearing on Fintech Regulation

House Financial Services Committee Task Force on Financial Technology

“Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation”

Tuesday, June 25, 2019

 

Key Topics & Takeaways

  • Integration of the Banking System and Fintech: Knickerbocker said that the current pace of innovation within the banking system is unprecedented, and that while it offers opportunity for the expansion and growth of the economy, she noted that is also carries some serious risk. She said that moving forward the OCC supports the innovative partnerships between banks and the fintech industry.
  • Regulators’ Role in Technology: Watkins said that the job of the OI is to create regulatory sandboxes to address any uncertainty that may impede innovation. Watkins also said that he encourages companies to conduct trial disclosure programs in order to specify procedures and provide coordination with other regulators. Clark stated that state regulators are committed to advancing Vision 2020.

Witnesses

Opening Statements

Chairman Stephen F. Lynch (D-Mass.)

In his opening statement, Lynch noted that technological innovation is not caused by a crisis, but rather due to consumer preference. He said that the velocity of technological change in the financial system is “immense and unprecedented.” Lynch stated that innovations can lower the cost of lending for consumers and increase the overall consumer wellbeing, but he pointed out that tech advancements come with major risks. He said he believes without oversight, data can be turned into alternative forms of discrimination.

Ranking Member French Hill (R-Ark.)

In his opening statement, Hill noted that Congress should promote and foster innovation. He said that the Fintech task force can enhance the understanding of big data and big data analytics. He stated that the goal of this and future hearings will be to ensure compliance is less costly and more effective, saying that the task force should be focused on the American consumer as the ultimate beneficiary. He stated that the overall goal is to hear more about collaboration rather than regulation and made clear that he understands the importance that banks have a robust level of safety, and they must ensure they are protecting their customers’ privacy.

Testimony

Paul Watkins, AD, Office of Innovation, CFPB

In his testimony, Watkins stressed that the focus of the Office of Innovation (OI) is to increase fairness, transparency, competition, and consumer access within financial services. He noted that the OI plans to accomplish this by creating regulatory sandboxes, collaborate with federal, state and international regulators, and engage with stakeholders regarding issues related to innovation. He noted that the Consumer Financial Protection Bureau (CFPB) proposed the creation of a Disclosure Sandbox by revising its existing Policy to Encourage Trial Disclosure Programs. He said the CFPB is also proposing revisions to the existing policy on no-action letters, and that these policies are still in the proposal stage. Watkins noted that CFPB is interested in participating in more collaboration with other regulators.

Beth Knickerbocker, CIO, OCC

In her testimony, Knickerbocker noted that responsible innovation allows the banking system to meet the everchanging needs of the marketplace. She emphasized the fact that innovation promotes economic opportunity, sparks jobs creation, increases consumer choice, enhances bank operations and allows banks to more effectively meet the needs of clients. She said the Office of the Comptroller of the Currency (OCC) supports the partnerships between banks and fintech companies and is proposing a Voluntary Innovation Pilot Program to support bank testing activities that can benefit consumers, businesses and communities. Knickerbocker stated that the OCC strongly supports the dual banking system and noted that laws or revisions to laws should remain tech neutral.

Valerie Szczepanik, Head of FinHub, Senior advisor for SEC

In her testimony, Szczepanik noted that the goal of FinHub is to change the way that the Securities and Exchange Commission (SEC) regulates in order to keep up with the fast-paced innovation of the financial system and fintech markets. She noted that FinHub is committed to understanding the impact of technology in the markets and is eager to see new beneficial technologies succeed, as long as these innovations comply with the laws and policies of Congress and regulators. She said the SEC plans to collaborate both internally and externally on fintech issues.

Charles E. Clark, Director, Department of Financial Institutions, State of Washington, on behalf of the Conference of State Bank Supervisors (CSBS)

In his testimony, Clark noted that the main goal of his office is to ensure that consumers are always protected. He stated that CSBC has announced Vision 2020, a commitment to drive towards an integrated system of licensing and supervision for nonbanks. He explained that Vision 2020 initiatives include developing robust technology tools, prioritizing IT and cybersecurity training, improving third-party supervision and seeking industry input from fintech firms.

Christopher Woolard, Board Member and Director of Strategy and Competition, Financial Conduct Authority (FCA), United Kingdom

In his testimony, Woolard highlighted the FCA’s approach to innovation policy and emphasized the importance that regulators attach to outcomes. Woolard also discussed the importance of international cooperation and stated that it is important for regulators to consider the dangers of potential new innovations not coming to the marketplace. He said the FCA established Project Innovate to make it easier for innovators to get ideas to the marketplace and the FCA Sandbox to test these innovations in a live market environment.

Question & Answer

Integration of the Banking System and Fintech

Rep. Stephen Lynch (D-Mass.) asked if the OCC has any concerns about blending between the banking world and the tech world. Knickerbocker said that OI spends time with companies that are not used to the regulated environment and the OCC will continue to provide technical assistance to these firms. Knickerbocker also pointed out that tech now constantly intersects with the banking industry.

Rep. French Hill (R-Ark.) asked about the benefits and shortfalls of open banking. Woolard responded that the majority of large banks have now adopted the use of open banking. He added that one issue with open banking is that there is a limited range of the types of products being offered in the marketplace.

Rep. Josh Gottheimer (D-N.J.) asked the panel if credit scoring models now have the responsibility to consider alternative data sources like monthly rent payments. All witnesses agreed that they should.

Rep. Al Lawson (D-Fla.) asked about the impact of innovation on minorities. Woolard responded that due to the lower cost that comes with technology and more widespread use, access for minorities and people living in more secluded areas will increase.

Rep. Bryan Steil (R- Wis.) asked if customers in the UK have gained access to services that were previously not available to them. Woolard responded that access has opened as a result of fintech and that there has been innovation in the basic savings market for consumers.

Regulators’ Role in Technology

Rep. David Scott (D-Ga.) asked if Knickerbocker agreed with the regulatory harmonization aspect of H.R. 1491, the Fintech Act of 2019. Knickerbocker responded that part of the OCC’s job is to work with banks and fintech companies in order to make sure they understand what it means to work in a regulated environment and help eliminate any uncertainties, adding that harmonization between regulators is important to accomplish the end goal.

Rep. Blaine Luetkemeyer (R-Mo.) asked if there was a productive way to control innovators and protect information. Woolard responded that by using the regulatory sandbox, the innovation can be tested, and the goal is to secure innovation in the interest of the consumers.

Rep. Cindy Axne (D-Mich.) asked about differentiating between completely new services entering the market versus new innovative ways of performing a service. Clark responded that since this will decide how the firms are regulated, it is important for there to be complete communication in order to better understand the industry. He said regulators then need to look at the firm’s business model and decide what type of service the firm is offering and what type of regulation is needed. Axne then asked how one defines innovation. Watkins responded that it truly is dependent on the benefit the service brings to the marketplace and consumers.

Steil asked how to best deal with regulatory arbitrage when dealing with fintech companies. Woolard responded that the FCA has not had to deal with any issues related to this, as the FCA technically does not regulate banks, but rather it regulates the act of “deposit taking.”

For more information on this hearing, please click here.