In responding to a request from Congress, the Government Accountability Office released a 136 page report last week detailing the fintech regulation logjam in the United States and offering recommendations for how the landscape can be improved to better facilitate this nascent industry's development.
The report specifically addresses four types of emerging fintech activities: payments, lending, wealth and financial advice (i.e. “robo-advising") and distributed ledger technology – a basket that includes blockchain and cryptocurrencies.
It dives into the benefits and risks posed by each category, the Byzantine regulatory maze that companies operating in these areas must navigate, the innovative steps that foreign jurisdictions like Singapore, Hong Kong and the United Kingdom have taken to foster fintech ecosystems – such as regulatory sandboxes - and lessons the U.S. should take from these experiments.
Below I present five key takeaways from the report.
1. Complying with Federal and State Regulations is Onerous and Expensive
This won’t come as any surprise to fintech and cryptocurrency companies who desire to operate in the U.S., but the GAO reaffirmed that the alphabet soup of federal agencies and 50+ state agencies involved in licensing and financial regulation is causing significant headaches.
The report states:
“Fintech firms can find that the complexity of the U.S. financial regulatory system creates challenges in identifying the laws and regulations that apply to their activities, and that complying with state licensing and reporting requirements can be expensive and time-consuming for mobile payment providers and fintech lenders.”
Stakeholders interviewed by the GAO reported that obtaining all relevant state licenses generally costs between $1M to $30M once legal fees, state bonds and direct regulatory costs are factored in. One fintech firm said that it spent half of all the funds it raised through venture capital just on obtaining state licenses.
While this fragmentation is surely weeding out some bad actors, it creates great difficulty for those that are trying to be compliant and do things the right way. The report authors note instances of manifold confusion among entrepreneurs on basic matters like determining which agencies are responsible for what and who they need – and don’t need - to report to.
2. Federal Agencies Need to Coordinate Better
While many agencies such as the Commodity Futures Trading Commission have individually made laudable efforts to initiate dialogue with the fintech community, there is a glaring lack of coordination among the 10 different federal agencies responsible for fintech regulation in some form.
(By contrast, there are just four such agencies in Hong Kong, three in the U.K. and one in Singapore)
“[F]ederal agencies could improve collaboration and clarify issues related to financial account aggregation by making sure that interagency efforts dedicated to fintech include all relevant participants and incorporate other leading practices,” the report reads, adding that “the majority of market participants and observers we interviewed who commented on interagency collaboration said that it could generally be improved.”
Pursuant to this finding, the GAO recommends several ways to improve collaboration – such as better defining agency roles and responsibilities and better defining preferred outcomes – that could help ease the bottleneck.
“Given their mandated consumer protection missions, regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services,” it states.
3. Fintech Firms Aren’t Harming Consumers
While much of the regulation and oversight that fintech companies must abide by is explicitly in place to protect consumers and investors, the GAO found that these types of firms are rarely the subject of complaints and that indications of widespread harm are “limited.”
The report reads:
“Available regulatory data show that the number of consumer complaints against fintech activities appears modest compared to traditional providers … [O]ur analysis showed that for 13 large firms offering fintech payments, lending, investment advice, financial account aggregation, or virtual currencies, only 5 of the firms had complaints in the CFPB database, with 4 having received fewer than 400 complaints.”
4. OCC Fintech Charter? Don’t Hold Your Breath
Seeking a potential lifeline to a simpler regulatory and licensing environment, many companies in the fintech and cryptocurrency space have embraced the option of a national fintech charter - first proposed by the Office of the Comptroller of the Currency in late 2016 - as a possible fast lane.
The GAO makes it clear that anyone still holding out hope on this front may be wise to have a contingency plan:
“OCC officials we interviewed told us that this special-purpose national bank charter is on hold because they are still reviewing whether to go forward with the proposal, and [the Conference of State Banking Supervisors] has filed a lawsuit against OCC challenging the fintech charter.”
Further, it noted that the charter likely won’t be feasible for smaller companies if the capital requirements imposed are the same as for regular banks.
5. Fintech Innovators are Avoiding the U.S.
The GAO report repeatedly stresses that the labyrinth of regulations and general uncertainty in the U.S. has an important unintended consequence – namely, that fintech companies are increasingly moving their operations to friendlier jurisdictions.
“Fintech payments and DLT firms and other market participants told us that navigating this regulatory complexity can result in some firms delaying the launch of innovative products and services—or not launching them in the United States—because the fintech firms are worried about regulatory interpretation,” the report notes, adding that:
“For example, staff from one U.S. firm that developed a DLT payments technology told us that they and their peers only work with foreign customers due to the fragmented U.S. financial regulatory structure and lack of unified positions across agencies on related topics.”