Ex-OCC Counsel Predicts Caution From Regulators on Fintech

By Gregory Roberts

June 8 — Federal bank regulators likely will balance their support for technological innovation in financial services with a hefty dose of safety-and-soundness-based caution, a longtime regulator now in private consulting told Bloomberg BNA.

The ex-regulator, former chief counsel Julie Williams of the Office of the Comptroller of the Currency (OCC), said the financial crisis still exerts a sobering effect on the prudential regulators.

“It reinforces an instinct that's already there,” she said.

At the same time, Williams said June 3 in an interview at her office at Promontory Financial Group in Washington, the regulators realize they cannot simply turn their backs on the new technology.

“Recognizing that in order for the institutions to be healthy, they need to be able to effectively compete is crucial,” she said. “There are going to be sectors where, in order to do that, they're going to have to innovate.”

Williams spent 19 years at the OCC, all but the first as chief counsel, and twice served as acting comptroller. She left in late 2012, several months after Thomas Curry was sworn in as comptroller. Early the next year, she joined Promontory, where she advises banks on how to navigate the regulatory straits.

White Paper, Speech

The OCC released a white paper in March on accommodating innovation, and Curry gave a speech at Harvard on the subject the same day. The white paper and Curry speech were regarded in some quarters of the legal and financial service communities as heralds of a sea change in regulatory attitudes, but Williams urged a close read, noting that the paper and the speech “are laden with caveats” not only about safety and soundness considerations in regard to fintech innovations, but also about consumer compliance concerns. Those concerns range from fair lending to issues involving the Community Reinvestment Act and the Bank Secrecy Act.

The Independent Community Bankers of America (ICBA), an association of thousands of smaller banks, wrote a letter to the OCC June 1 as a comment on the March white paper, raising questions about a level regulatory playing field for banks and fintech innovators.

“ICBA has been very concerned about the regulatory advantage that now exists with online marketplace lenders and supports a regulatory framework for online lenders that is no less stringent than the framework that applies to community banks,” the letter said.

The ICBA expressed particular concerns about the reported consideration by regulators of a specially tailored federal charter for marketplace lenders or other fintech companies — one that the association fears would amount to lighter-handed regulation of those operators compared to banks.

Williams said she doesn't think a fintech charter is likely. “The OCC is very sensitive to the safety and soundness issues presented by niche charters of any type,” she said.

D.C-Born, Virginia Raised

Williams was born in Washington and grew up in Northern Virginia, her father a lawyer with the Department of Justice, and her mother a journalist who took up homemaking full time after her daughter was born. A child of the 1960s, Williams attended Goddard College in Vermont, a school regarded as notably progressive even by the countercultural standards of that time. “The unstructured environment was appealing,” she said. She studied abroad in Greece and England before graduating in 1971.

She enrolled next at the then-new Antioch School of Law, founded in Washington by Edgar and Jean Cahn, longtime advocates of legal services for the poor. It was at Antioch Law, which has since morphed into the law school at the University of the District of Columbia, that Williams got a taste of corporate law — and found, to her surprise, that she liked it.

After earning her law degree, she was hired by the Washington, D.C., firm of Fried, Frank, Harris, Shriver & Kampelman LLP and worked there for seven years before she was recruited to federal service at the Federal Home Loan Bank Board, later the Office of Thrift Supervision. She moved to the OCC as deputy chief counsel 10 years later, in 1993.

Soft-spoken and genial, her gray eyes framed by black wire-rimmed glasses beneath a thick mound of short, silver-white hair, Williams holds the title of managing director and director of domestic advisory practice at Promontory, a high-powered consulting firm that marks a distinct change from her years in the federal bureaucracy.

“I don't have an inbox or outbox here,” Williams said — a contrast to her document-heavy, highly structured government service.

Third-Party Risk

Williams left the OCC before fintech demanded the agency's attention, but she was there for “the deconstruction or disaggregation of elements of banking” that accelerated in the late 1990s: the resort by banks to third-party service providers for everything from data processing to marketing to mailing replacement checkbooks. What's now called TPRM, for third-party risk management, lies at the heart of the engagement by the banks, and bank regulators, with fintech.

The rapidly increasing number of partnerships, white-label programs and other arrangements between banks and online marketplace lenders, as an example, has emerged as a particular focus of regulatory concern.

“How do you do third-party risk management if you've got a fintech company doing things for the bank that has technology that you don't understand?” Williams said. “How can you satisfy what the regulations typically expect for oversight of third-party providers if you don't understand what they are doing?

“There's a whole life cycle of expectations that the regulators have with respect to third-party risk management that's not specific to any particular type of third-party arrangement,” she said. “Regulators are not going to abandon those fundamentals just because the third party is a fintech company.

“There will always be innovation in the form, shape and delivery of financial products and services. That's inevitable, and it is a good thing,” she added. “We're just seeing a very conspicuous manifestation of this, and it is presenting a new generation of regulatory challenges.”

To contact the reporter on this story: Greg Roberts in Washington at groberts@bna.com

To contact the editor responsible for this story: Mike Ferullo at mferullo@bna.com