Fintech’s Achilles heel: The U.S. regulatory system

American Fintech is in danger. There is a real risk that financial innovation will fall between the cracks of what is already a convoluted system of regulation in this country. That is bad for everyone. It’s bad for the innovators and the public, bad for existing institutions and even bad for the regulators themselves.

Brexit may give the U.S. and other Fintech centers some breathing space as London struggles to maintain their Fintech edge. The U.S. however needs more than breathing space.  Our regulatory regime is simply unwieldy.

Certainty is an advantage

Fintech start-ups, and the innovations they foster, are particularly likely to be subject to confusing and potentially crippling regulatory supervision

The current confusion in regulatory oversight gives those countries with supervisory certainty a distinct advantage.  That is not just my opinion; it is the opinion, albeit paraphrased, of no less than the U.S. General Accountability Office (GAO) – the audit, evaluation, and investigative arm of Congress.

In March of this year the GAO released a cogent and readable report, FINANCIAL REGULATION: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness. The report does an admirable job of explaining the challenges facing regulators. The well-crafted report uses interactive infographics and plainly shows how U.S. regulation has become a perplexing Gordian knot.

The report is focused on weaknesses in the overall regulatory structure. Fintech, of course, represents only a sliver of the U.S. financial institutions industry. However, even the report recognizes that Fintech start-ups, and the innovations they foster, are particularly likely to be subject to confusing and potentially crippling regulatory supervision.

Nurturing the industry

The sad part is that regulators understand the need to nurture this promising new industry. The Office of the Comptroller of the Currency (OCC), who seems to have taken the lead in addressing all issues Fintech, are certainly making an effort. Thomas Curry, the Comptroller of the Currency, recently hosted a conference on responsible innovation and is said to be examining the possibility of limited-purpose charters for Fintech firms.

In fact, the OCC, issued a white paper in March of this year entitled Supporting Responsible Innovation in the Federal Banking System: An OCC PerspectiveIn it, the agency outlines how they might encourage innovation while ensuring safety and soundness.  All these steps must sound quite encouraging to a Fintech entrepreneur, but that brings us back to the GAO’s assessment – “could be streamlined to improve effectiveness.”

It is not entirely clear where the authority to regulate Fintech lies

While the OCC is working hard to boost innovation, they are just one of the many supervisory bodies that may have a say over financial innovation. I say “may” because it is not entirely clear where the authority to regulate lies. Even in their own white paper the OCC acknowledges that they need to collaborate with other regulators, establish regular channels of communication and use best efforts to avoid inconsistent communications.

Besides the OCC, Fintech disruptors must look to

  • The Federal Reserve
  • The Consumer Financial Protection Bureau
  • The Financial Industry Regulatory Authority
  • The Securities and Exchange Commission
  • The Federal Deposit Insurance Corp.
  • The Financial Crimes Enforcement Network
  • Along with all 50 state regulators

While banks and other financial institutions have multiple supervisors – at least they know who is responsible. With a Fintech firm, nothing is definitive at this point.

Lagging other countries

Even bankers agree that the U.S. lags behind other countries in the way we regulate innovation. Rob Nichols, President of the American Bankers Association, wrote,

Our regulators can learn much from Britain about how to stimulate new ideas from outside banking and to integrate them under a common set of regulatory expectations.

Most financial regulation was written long before the technological advances driving Fintech were created, and even Dodd-Frank was drafted before the recent surge in investment in the area.

The solution could be as simple as designating a primary regulator for financial innovation, or perhaps designating a new partnership between agencies.

Until there is clarity on the subject, Fintech firms, their management, and their investors will remain at risk and American financial innovation is bound to suffer.



This post originally appeared in American Banker July 18, 2016.

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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