The Office of the Comptroller of the Currency (OCC) wants banks to know that it is the regulator with open arms for innovation. Although the OCC's push to create a special purpose national bank charter for fintechs ("fintech charter") has yet to bear fruit, the agency's groundwork on responsible innovation opened the door to other opportunities. Its latest effort, as announced on April 30, 2019, is a proposed Innovation Pilot Program ("Program") providing national banks and other OCC-supervised financial institutions with a framework to test not only solutions but also innovative product offerings.
After the fall of 2018—when the New York State Department of Financial Services and the Conference of State Bank Supervisors again filed suit to block the OCC from issuing any fintech charters—existing banks hoped someday soon there would be an option for institutions that wanted to both innovate and take deposits (the latter is prohibited under a fintech charter). Those waiting patiently to see what Comptroller Joseph Otting calls "the future of supervision and the evolution of the U.S. banking system" may find much to like in the Program.
The Program is essentially a regulatory sandbox, although strictly speaking, the Program does not faithfully adhere to that approach. The OCC notes that it seeks, in part, to avoid any perceived regulatory endorsements of particular products or companies and to minimize the potential for consumer harm. The Program is not open to all: only national banks, federal savings associations, and federal branches and agencies of foreign banks may submit proposals.
The Program has five objectives:
- Support responsible innovation, including the development and delivery of more effective and efficient activities;
- Offer timely engagement between the OCC and eligible entities regarding expectations and requirements of the Program;
- Further the OCC's understanding of, and ability to supervise, innovative activities and their related risks;
- Foster the development of controls and safeguards commensurate with the nature, scale, and risk posed by innovative activities; and
- Review and, as necessary, adapt supervisory approaches that might unintentionally or unnecessarily inhibit responsible innovation.
The Program does not require any fees to participate, and OCC welcomes pilot proposals in varying stages of development: from those that are merely a proof of concept to those more advance and ready for live testing. However, any proposal does need to demonstrate how OCC involvement in the pilot is appropriate, how the proposed activity is within the scope of the OCC's authority, and how the pilot, if successful, would achieve one or more of the following:
- Meet the evolving needs of consumers, businesses, and communities;
- Promote financial inclusion, fair access, and fair treatment;
- Improve the efficiency or effectiveness of bank processes, operations, or provision of financial services;
- Mitigate significant risks to individual banks or the overall banking system; and
- Advance risk management, security, and regulatory compliance.
The OCC expects its engagement in any approved pilot to last between 3 and 24 months. Proposals must also include exit strategies that the OCC can trigger if it deems necessary, and each entity can voluntarily withdrawal from the Program if decides it's all too much and wants to cease the pilot project. The OCC understands that pilots, by their nature, may have regulatory uncertainties, but eligible entities must work with the OCC as part of the Program to address any legal permissibility issues. Waiting to resolve these questions until after live tests begin would be too late because the Program "does not absolve entities participating . . . from complying with applicable laws and regulations."
The OCC encourages eligible entities that want to participate to say "here we are" and engage OCC in preliminary discussions about the proposed pilot. After such discussions, the entity can submit a formal expression of interest (EOI) to the OCC's Office of Innovation. The EOI will be evaluated against the scope and complexity of the proposed pilot. EOIs that include live testing will be subject to greater scrutiny, particularly with regard to proposed controls and safeguards for the pilot.
The OCC requests feedback and public comment on the Program proposal be submitted by June 14, 2019. OCC-supervised banks that are interested in testing innovative products and tools may want to seek clarification on how the OCC will coordinate with other regulators. The proposal's brief discussion of this aspect suggests pilots under the Program will be treated largely just the same way as other new activities. Despite a few necessary notes of caution, however, the overall message of the Program is faith in the heartland of the financial system—i.e., in banks themselves—to be creative, progressive, and innovative in developing financial technology.
The OCC is on a journey to transform itself into a regulator known for encouraging, rather than stifling, innovation. Please contact any of the authors for more information as we continue to monitor the OCC's progress.