This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
Quarles outlines future course for FSB. Having achieved most of its post-crisis reform agenda, the Financial Stability Board should apply "cutting-edge thinking and a disciplined methodology" to addressing new and evolving global risks in the financial sector, while making improvements to the regulatory regime, all in a spirit of outreach and transparency. That was the message conveyed by Randal Quarles in his first major address as FSB chairman on February 10 in Hong Kong. Quarles, who also serves as the Fed's vice chairman for supervision, said that with the Basel III regulatory structure and capital requirements finalized, the FSB should turn its attention to a review of its framework for assessing vulnerabilities to international financial stability to make it "flexible enough to handle a financial system that will continue to evolve over time" with new challenges "like the emergence of crypto-assets." He that a committee to assess emerging vulnerabilities is being led by FSB Vice Chair Klaas Knot of the Dutch National Bank, who is slated to succeed Quarles as chairman in 2021. Quarles said that the longer term effectiveness and legitimacy of FSB will be grounded in an ongoing process of "engagement, outreach and transparency" with a broad range of stakeholders. As an example of the board's enhanced outreach efforts, Quarles cited the six Regional Consultative Groups, which he said "are great in concept, but they have struggled in practice." Created in 2011 to bring together both G-20 member states and other countries in specific geographical regions to identify risks and financial stability priorities, the RCGs are currently undergoing an FSB review and Quarles said he planned to attend many of their meetings. He also said that the board will publish its work plans publicly for the first time, with at least 60-day public consultation periods.
FSB report sees BigTech as greater competitive threat to banks than FinTechs. While the "the relationship between incumbent financial institutions and FinTech firms appears to be largely complementary and cooperative in nature," according to a recent FSB report, "the competitive impact of BigTech may be greater than that of FinTech firms." As part of its ongoing monitoring of FinTech developments and their implications for stability, FSB on February 14 published FinTech and market structure in financial services. The report notes that the benefits promised by technological innovation from the newer entrants into the banking sector are accompanied by disruptions that "could materially alter the universe of financial services providers." More competition from a more diverse group of players in the sector "can create a more efficient and resilient financial system," FSB says, but it "could also put pressure on financial institutions' profitability and this could lead to additional risk taking among incumbents in order to maintain margins." The report notes that "BigTech firms typically have established customer networks and enjoy name recognition and trust." Finally, FSB warns about the need for authorities to keep an eye on the implications of financial institutions' reliance on third-party service providers for data provision, cloud storage and analytics, and physical connectivity, though the report says such dependencies are currently still low.
Illinois congressman seeks to lead new FinTech task force. Representative Bill Foster (D-IL) has stepped forward to pursue the chairmanship of a new Congressional task force on financial technology. In a February 11 letter to House Financial Services Committee Chairwoman Maxine Waters (D-CA), Foster sketched out his vision for the task force's agenda and how he would wield its legislative and oversight authority, as well as prior experience he would bring to bear as a scientist, small business owner and co-chair of the Congressional Blockchain Caucus. Waters has identified FinTech issues as a priority for the committee, and Foster's letter indicates that the task force "will be convened in the coming weeks." Foster told Waters he would work to monitor developments in the Fintech industry, "including marketplace lending for consumers and small businesses, partnerships with traditional financial institutions, cryptocurrency, blockchain, alternative data utilized in credit underwriting, artificial intelligence, and machine learning." Citing CFPB's recent proposal to rescind the ability-to-repay provisions of its payday loan rule, he pledged that "ensuring that the underserved and underbanked communities have options and access to credit beyond predatory lenders will be a concern at the forefront of our inquiry." Foster also said he would work to see how FinTechs "can shoulder their fair share of the obligation to help meet the needs of low- and moderate-income communities, and ensure a fair playing field with community banks and other financial institutions," even though they are not subject to the same compliance regime as traditional banks under the Community Reinvestment Act. And he said he would examine how "financial technology companies use complex algorithms to underwrite loans," and to ensure their compliance with fair lending laws.
Analysis finds no need for sweeping "regulatory rethink" of FinTech payments system. A recent study by a senior Treasury Department official casts doubt on whether the groundbreaking innovations that FinTech is bringing to the financial services sector will require similarly revolutionary changes to the rules governing payment services. A January 24 analysis by Matt Swinehart, a senior counsel at Treasury, appearing on the FinTech Policy blog and titled "New Payment Services Won't Always Require A Regulatory Rethink," argues that, when it comes to payment services, "this revolution narrative does not hold in all cases." Swinehart argues that the rules and standards governing payments are "technology and business-model neutral because they can apply to new technologies and business models without modification in nearly all instances." This means that "payments regulation is more durable in the face of financial change than the conventional wisdom would predict." The analysis says regulators should continue to evaluate shortcomings of the existing system that are revealed by new entrants and services, and clarify how existing rules can be applied to new technologies and business models, but concludes that, "None of these approaches require the upending of the existing framework for payments regulation." The analysis notes that Swinehart's views are not necessarily those of the Treasury Department.
House committee looks at access to banking for cannabis-related businesses. In a historic first, the House Financial Services Committee tackled the question of how banks and credit unions can serve state-authorized cannabis-related businesses without running afoul of federal authorities. The much anticipated and well attended February 13 hearing focused on draft legislation proposed by Representative Ed Perlmutter (D-CO), a committee member, known as the SAFE (Secure and Fair Enforcement) Banking Act, which would mandate that depository institutions are no longer liable to federal enforcement action or subject to forfeiture for providing loans or other financial services to legitimate marijuana-related businesses, including companies that provide ancillary services to those businesses, in the growing number of states where medicinal and recreational use of marijuana has been legalized. The hearing featured testimony from state government and law enforcement officials, growers' advocates, and representatives of the community banking and credit union industries, with only one panelist opposed to the legislation. The ABA also submitted a statement for the record stating that "leaving this industry unbanked is no longer a viable option" and called upon Congress to develop a solution "which will improve the ability of banks to meet the needs of their local communities." "The fact is, you can't put the genie back in the bottle," Perlmutter testified at the hearing. "Prohibition is over. Our bill is focused solely on taking cash off the streets and making our communities safer." A version of Perlmutter's legislation attracted 95 bipartisan co-sponsors in the previous session of Congress.