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Last week, the Office of the Comptroller of the Currency (OCC) announced it would begin accepting applications for special-purpose national bank charters from fintech companies conducting banking activities other than taking deposits. The OCC also released a supplement to the Comptroller's Licensing Manual outlining the process for submitting fintech charter applications. Although the OCC's action is sure to be challenged by state regulators and others, the OCC's announcement is a highly anticipated step that offers fintech companies the opportunity to reduce regulatory burdens of operating under the laws of multiple states in exchange for supervision and regulation by a single agency under federal law.

In its release, the OCC explains that a fintech company chartered as a special-purpose bank will be subject to the same safety and soundness standards as other federally chartered banks, but that the OCC plans to tailor these standards based on the company's size, complexity, and risk profile. The release does not detail what such tailoring would look like, but it does state that chartered fintechs:

  • will be supervised like similarly situated national banks with respect to capital, liquidity, and risk management;
  • must demonstrate a commitment to financial inclusion similar to the standards applicable to deposit-taking institutions under the Community Reinvestment Act; and
  • will be required to develop contingency plans to address financial stress.

The OCC's announcement coincided with the Department of the Treasury's release of a lengthy report on innovation in the financial sector. Among other things, Treasury endorsed the OCC's approach to chartering fintech companies as special-purpose national banks, encouraged banks to partner with fintech companies, and also encouraged states to harmonize their regulatory and supervision regimes to reduce burdens on financial companies.

Fintech Applications

The OCC's release states that the agency will use the existing chartering standards and procedures, found in the Comptroller’s Licensing Manual, for processing fintech applications. In the application process, the OCC will review:

  • whether a proposed company:
      • has a reasonable chance of success,
      • will be operated in a safe and sound manner,
      • will provide fair access to financial services,
      • will treat customers fairly,
      • will comply with applicable laws and regulations, and
      • can reasonably be expected to achieve and maintain profitability;
  • whether approving the charter for a particular company will foster healthy competition;
  • whether the business plan submitted in connection with the application articulates a clear path and timeline to profitability;
  • whether the company has adequate capital and liquidity to support its projected volume; and
  • whether the company has organizers and management with appropriate skills and experience.

Given the OCC's announced intention to process fintech charter applications similarly to those for depository institutions, in our experience, a strong application will show that a company:

  • is well-capitalized with substantial liquidity;
  • has a strong management team, including in compliance and financial inclusion/community affairs;
  • has a detailed business plan describing not only the company’s activities and business model, but also risk management and internal controls (including with respect to consumer protection and BSA/AML issues); and
  • will, if chartered, serve the financial needs of a diverse constituency.

Any fintech company considering a federal charter should consider the potential collateral consequences of becoming a special-purpose national bank, including the potential interplay of federal securities laws and possible treatment as a bank under the Bank Holding Company Act. These issues will need to be evaluated on a company-by-company basis given the particular product and service set offered.

"Toddlers Play in Sandboxes"

Although the OCC's release is a major step toward creating a streamlined regulatory structure for new and innovative fintech companies, it will likely be challenged by states and other groups interested in maintaining the current state-dominated regulatory landscape for non-depository financial services companies. Indeed, one of the primary benefits of a federal charter will be relief from compliance with the laws of state regulatory regimes, such as state-based licensing. As such, certain state regulators have made clear they do not support the OCC's action. On the same day as the OCC's announcement, the Superintendent of New York's Department of Financial Services released a statement "fiercely" opposing Treasury's endorsement of regulatory sandboxes for fintech companies as well as the OCC's decision to begin accepting fintech charter applications. As the Superintendent colorfully put it, "Toddlers play in sandboxes. Adults play by the rules."

Doubtless aware of opposition from state regulators and other entities, the OCC in its release emphasized that the National Bank Act provides the agency broad authority to grant charters for national banks to engage in the "business of banking," which the OCC has long interpreted to extend to limited-purpose national banks, such as credit card banks and national trust banks, and now interprets to include the proposed special-purpose national banks.

The Road Ahead

The OCC's announcement and the guidance provided for fintech charter applications should be a key signal to companies that have been considering a federal charter to redouble their efforts. Arnold & Porter's attorneys have a deep knowledge of the chartering process and stand ready to assist clients considering this new federal option.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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