On December 2, 2016, the Office of the Comptroller of the Currency (“OCC”) announced its intention to move forward with considering applications from financial technology (“FinTech”) companies to become special purpose national banks. In his prepared remarks at the Georgetown University Law Center announcing the release of a new white paper entitled, “Exploring Special Purpose National Charters for FinTech Companies” and the opening of a 45-day comment period, Comptroller Curry signaled an openness to the FinTech industry and said, “It is clear that FinTech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters.” Companies seeking such a charter will be evaluated by the OCC to ensure that they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity. The OCC’s newly released white paper details the issues and conditions that it will consider in evaluating any entity seeking a special purpose national bank charter. As the OCC evaluates the process to be put in place for granting such charters, it seeks feedback on all elements of the white paper and 13 additional questions concerning the public policy benefit of such a charter, elements to be considered in evaluating capital and liquidity, financial inclusion, consumer protection, safety and soundness, and overall approach to regulating FinTech companies. All comments must be submitted by January 15, 2017.

Background
Responsible Innovation Initiative
In August 2015, the OCC announced an initiative to better understand trends and innovations in the financial services sector and develop a framework for responsible innovation. In the following months, the OCC conducted extensive research and met with numerous stakeholders, including FinTech companies, banks, community and consumer groups, academics, and fellow regulators. In March 2016, the OCC subsequently published a white paper outlining the principles that would guide the development of a framework that would support responsible innovation in the federal banking system. Most recently, in October 2016, the OCC released its “Recommendations and Decisions for Implementing a Responsible Innovation Framework,” which set forth specific actions to be implemented by the OCC when evaluating new products, services and processes, and any associated risks, the core components of which are: (1) establishing an outreach and technical assistance program for banks and nonbanks; (2) conducting awareness and training activities for OCC staff; (3) encouraging coordination and facilitation; (4) establishing an innovation research function; and (5) promoting interagency collaboration. The OCC also announced the creation of an Office of Innovation to serve as a central point of contact and clearinghouse for relevant requests and information concerning innovation. The Office of Innovation will be headed by a Chief Innovation Officer and will include Innovation Officers based in offices in Washington, D.C., New York, and San Francisco.

Features of a National Bank Charter
Applicable Laws
Entities chartered by the OCC as a special purpose national bank will be subject to the National Bank Act, which will dictate both corporate organization and structure and limit them to certain bank permissible activities. The OCC believes that the National Bank Act is sufficiently adaptable to permit its regulated institutions to engage in new activities that are a part of the business of banking. As a part of the chartering process, the OCC will consider on a case-by-case basis the permissibility of any proposed activity that a company seeking a special purpose charter may conduct. Chartered entities will also be subject to the same laws, regulations, examinations, and ongoing supervision as other national banks, including the Bank Secrecy Act (BSA), other anti-money laundering (AML) laws, and OFAC compliance. Additionally, special purpose national banks generally are subject to the prohibitions on engaging in unfair or deceptive acts or practices under Section 5 of the Federal Trade Commission Act and unfair, deceptive, or abusive acts or practices under Section 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Coordination Among Regulators
The OCC is the prime prudential regulator and supervisor of special purpose national banks. This means that in some instances state law will be preempted and there will be limits on state visitorial authority. However, depending on the structure of the bank and the activities it conducts, other regulators may have oversight roles as well. Additional regulators with potential oversight include:

  • Federal Reserve System: Generally speaking, all national banks are required to be members of the Federal Reserve System. Most special purpose national banks will be member banks; therefore, the statutes and regulations that apply to member banks will also apply to them.
  • Federal Deposit Insurance Corporation (FDIC): Any entity that proposes to accept deposits, other than trust funds, must apply to and receive approval from the FDIC.
  • Consumer Financial Protection Bureau (CFPB): Any entity that engages in an activity that is regulated under a federal consumer law (Dodd-Frank) may be subject to CFPB oversight. Additionally, to the extent that a special purpose national bank is an insured depository institution, it will generally be supervised by either the CFPB or OCC for the purposes of federal consumer financial laws.

Supervisory Expectations
Any entity seeking a charter must have in place certain standards that ensure the safety and soundness of that institution. These baseline expectations include a detailed business plan, governance, capital, liquidity, compliance risk management, financial inclusion, and recovery and resolution planning. The OCC will tailor its expectations based on the institution’s size, complexity, and risks. Prior to filing an application, the OCC recommends a meeting to discuss these expectations in detail and any others that may arise from the institution’s particular proposal.

  • Business Plan: Applicants must clearly state why they are seeking a national bank charter and provide significant detail about the proposed bank activities. A business plan should cover a minimum of three years, demonstrate a reasonable chance for success, and cover the proposed actions and primary function of the applicant. The plan should also include: (1) an outline of the plans for initial and future capital contributions, and a plan for maintaining and monitoring appropriate capital levels; (2) a written summary of how the proposed bank will organize its resources and how it will measure progress; (3) a definition of the market it plans to serve and the products and services it will provide; (4) a realistic forecast of market demand, economic conditions, competition, and customer base; (5) an assessment of risk, including an assessment of all risks inherent to the proposed products and services; (6) an assessment of risks relating to BSA/AML requirements, consumer protection, fair lending requirements, and a design of management controls; (7) a description of the experience and expertise of proposed management; and (8) alternative business strategies to address various best-case and worst-case scenarios.
  • Governance Structure: The governance structure should promote safety and soundness and be commensurate with the risk and complexity of the proposed organization. The board of directors must have a prominent role and be in a position to actively oversee the organization.
  • Capital: The applicant must maintain minimum and ongoing capital levels that are commensurate with the risk and complexity of its activities. In considering capital adequacy, the OCC will assess the scope and nature of the bank’s proposed activities, quality of management, funds management, ownership, operating procedures and controls, asset quality, earnings and their retention, risk diversification, and strategic planning.
  • Liquidity: The OCC will require sufficient liquidity to readily and efficiently meet costs without negatively impacting daily operations or the financial condition of the institution. In determining the sufficiency of liquidity, the OCC will consider projected funding sources, needs and costs; net cash flow and liquid asset positions; projected borrowing capacity; highly liquid asset and collateral positions; requirements for unfunded commitments; and the adequacy of contingency funding plans.
  • Compliance and Risk Management: The OCC expects a culture of compliance and commitment to applicable laws and regulations. This includes having in place all appropriate systems and programs necessary to meet compliance needs, including those focusing on BSA/AML compliance and consumer protection.
  • Financial Inclusion: Applicants should be prepared to demonstrate how their proposed plans will meet the needs of the community.
  • Recovery and Exit Strategies; Resolution Plan and Authority: Applicants need to have in place a plan for the orderly wind-down of the regulated entity.

Chartering Process
The OCC’s Licensing Department will follow its standard process for reviewing and making decisions, which includes four stages:

  • Prefilling Stage: Potential applicants engage with the OCC on both a formal and informal basis to discuss their proposal, the chartering process, and application requirements. Applicants should prepare a complete application and full business plan.
  • Filing Stage: Organizers submit their application and publish notice of the charter application.
  • Review and Evaluation Stage: The OCC conducts background and field investigations and reviews the application. In analyzing the application, the OCC will consider chance of success, safety and soundness, fair access to financial services, compliance programs, consumer protection, and whether the proposed model fosters healthy competition.
  • Decision Stage: This stage consists of three phases: (1) preliminary approval; (2) organization, when the bank raises capital, prepares for opening, and is examined; and (3) final approval, when the OCC decides whether all conditions have been met.

Conclusion
The OCC has clearly signaled that it is open to technological innovation. The FinTech industry should immediately review this announcement and the 13 questions posed at the end of the white paper under “Request for Comment.” The OCC’s willingness to engage with the FinTech industry represents a crucial opportunity for all facets of the industry to help influence the development of a regulatory process that is certain to have wide-reaching effects. Comments may submitted either directly to the OCC or through outside regulatory counsel.