Fintech Charter Likely to Lure Suitors, Despite Regulatory Burden

By Gregory Roberts

Dec. 2 — The payoff of preemption likely will lure at least some financial technology companies to apply for a national charter from the Office of the Comptroller of the Currency, despite the daunting regulatory hurdles outlined by the OCC Dec. 2, regulatory lawyers say.

“Looking at what the OCC has done, it pretty much assures that there will be some fintech charters,” Julie Williams, former OCC chief counsel and now a consultant with Promontory, in Washington, told Bloomberg BNA. “They can’t go through all of this buildup and then create a test that nobody can pass.

“However, the process to get to the fintech-charter finish line is not for the faint of heart,” she said. “This is a marathon, not a sprint.

“What they’ve described is the full load of regulatory obligations and standards that would apply to any national bank.”

After talking for months about the possibility of granting special-purpose national charters to fintech companies, Comptroller Thomas Curry told an audience at Georgetown University Law Center, in Washington, “Our next step, which I am announcing here today, is that the OCC will move forward with chartering financial technology companies that offer bank products and services and meet our high standards and chartering requirements.”

The agency also released a white paper on fintech charters. It will take comments on the proposal through Jan. 15.

The OCC has issued special-purpose charters before, to trust institutions and credit-card banks, for example. At least one fintech company has approached the OCC about a charter, according to a high agency official, but the agency had not established a clear policy on the subject. Curry said in October the agency would create a new office to promote innovation.

“I think the OCC is signaling that they are very open to working with fintech companies to make them a part of the national banking system,” David Luigs, a partner at Debevoise & Plimpton LLP in Washington, told Bloomberg BNA.

“The OCC says the same rules apply but they also say they have a lot of flexibility in their rules and they can tailor things, and they’re very interested in hearing how the fintech companies think the rules apply and in working with them both in the chartering process and in supervision,” Luigs said.

“The door is open,” he said. “The light is green.”

Preemption Is the Plum

A major advantage of a national charter is that it would preempt state laws that apply to lending, money transmission and other areas. The patchwork of state laws provides a significant challenge to online platform lenders, for example.

OnDeck, a leading platform lender, said it will consider pursuing a charter from the OCC.

“We applaud the OCC for taking this step forward and we are supportive of policy measures that create an efficient and harmonized national framework,” the company said in an e-mail to Bloomberg BNA. “While there is work still to be done, OnDeck sees today’s announcement as a positive development in the evolution of the fintech sector and clear recognition that internet-based innovations that benefit consumers and small businesses are here to stay.”

Kabbage, another leading platform lender, “is really excited about the charter process,” Sam Taussig, head of government relations and community banking, told Bloomberg BNA. “It’s something Kabbage is really interested in.”

The state-law preemption also could benefit money transmitters, which face the same 50-state obstacle course as lenders. The lenders would gain additionally from the ability to export interest rates from their headquarters states.

“I think a lot of people are going to look,” Oliver Ireland, a partner at Morrison & Foerster LLP, in Washington, told Bloomberg BNA. “Sooner or later, if you’re going to provide financial services, you’re going to have to meet some regulatory standards.”

But some of the charter requirements, such as for capital reserves or for OCC vetting of members of the boards of directors, could intimidate or exclude smaller start-up companies, Veronica McGregor, a partner at Goodwin Procter LLP, in San Francisco, told Bloomberg BNA. The many months likely needed to obtain a charter also could be a deal-breaker in an industry where innovators “want to launch the moment their programming is dry.”

“It’s going to take education,” McGregor said. “The cowboys are going to have to learn that what they’re doing is regulated activity, if it is, and the established parties are going to have to learn what the concerns are of those they’re trying to regulate”

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