The Path Forward: US Treasury Releases Fintech Report
On July 31, 2018, the US Department of the Treasury released its Report on Nonbank Financials, Fintech, and Innovation (the “Treasury Report”), containing approximately 80 recommendations on the regulation of financial services. The Treasury Report seeks to identify policies that will further the US position in financial services and innovation, pursuant to Executive Order 137772 on Reducing Regulation and Controlling Regulatory Costs.
The Treasury Report puts forward detailed recommendations applicable to financial services regulation, including in respect of activity-based financial services regulation. The Treasury Report also addresses a number of data regulation related matters (such as access by third parties to consumer financial data, and data security and breach notification requirements) and issues relating to digital identity, artificial intelligence, cloud computing and the use of technology by regulators (“Regtech”).
Consumer Access to Financial Data
The Treasury Report recommends that financial services regulators recognize the benefit of consumer access to financial data and consider measures to facilitate such access. The Treasury Report also recommends clarifying the treatment of data aggregators and Fintech application providers under current financial services legislation and working with the private sector to develop best practices on consumer disclosure for the use of financial data (including if necessary, principles-based disclosure rules), as well as addressing the issue of how best to ensure consumers are provided with an effective means to readily revoke prior authorizations.
The Treasury Report notes the risks associated with the current use of “screen scraping” to access financial data, and suggests that the current legal and regulatory regime could be impeding the implementation of more secure and efficient methods of data access (such as application programming interfaces (“APIs”)). Finally, the Treasury Report notes the importance, in facilitating access to financial data, of addressing the issue of data standardization (including, if necessary, through federal guidance) and of resolving questions regarding liability for unauthorized data access.
Data Security Laws and Breach Notification Requirements
The Treasury Report recommends that Congress pass a federal data security and breach notification law. Currently, individual states have data security and breach notification laws imposing varying requirements, such as California’s new Consumer Privacy Act. (see our blog post on the new California law here) The Treasury Report recommends the enactment of a federal data protection law based on technology neutral and scalable standards, which would vary depending on an organization’s size and the nature of its activities. The ultimate aim would be to have a uniform national standard for data security and breach notification.
The Treasury Report recommends that regulators work with the private sector to remove barriers to trustworthy digital legal identity products and services in financial services, and expresses support for efforts to implement a US government federated digital identity system.
The Treasury Report recommends that financial regulators modernize requirements and guidance for technologies like artificial intelligence and machine learning in the financial services sector. In particular, the Treasury Report recommends that financial regulators cooperate with the Select Committee on Artificial Intelligence formed as a result of the 2018 White House Summit on Artificial Intelligence for American Industry. Through cooperation, regulators could provide greater clarity for testing and responsible deployment of these technologies in financial services.
The Treasury Report recommends that federal financial regulation guidance (such as third party outsourcing guidance) be updated to facilitate the adoption of cloud computing, and suggests that “regulators should be wary of imposing data localization requirements” in connection with cloud computing. The Treasury Report also recommends that a cloud and financial services working group be formed and tasked with supporting regulators in the modernization of their cloud computing guidance and engaging with industry stakeholders.
The Treasury Report sets forth a number of recommendations aimed at updating the US regulatory framework to better enable innovation in financial services. In particular, the Treasury Report recommends moving forward with the Office of the Comptroller of the Currency's proposed Special Purpose Fintech Bank Charter. (see our blog post on the concept of the Fintech Charter here). The Treasury Report also recommends harmonizing state requirements and guidance in respect of licensing and supervision of lending and payments entities, bank partnerships with third parties, and the ability of banks to make innovation-related investments.
The development of “regulatory sandboxes” to enable Fintech innovation in certain jurisdictions is also discussed in the Treasury Report. The Treasury Report recommends that federal and state regulators cooperate to design a system that would function like a regulatory sandbox in order to facilitate innovation. The Treasury Report suggests such a sandbox would need to be supported by efforts by US regulators to engage with industry and their international counterparts.
“Agile” Regulation/ Regtech
The Treasury Report also addresses how to best enable “agile” regulation to improve efficiency and foster innovation. The Treasury Report recommends harmonizing regulation across states, possibly by using a passport system. Federal banking regulators could also cooperate on the development of a framework to regulate partnerships between banks and Fintechs, and to develop standards for API agreements between financial companies and data aggregators.
The Treasury Report also notes the emergence of regulatory technology (“Regtech”) (see our prior posts on Regtech here and here) and recommends that regulators explore partnerships with financial services firms and Regtechs to better understand technologies that could assist them achieving their mandate. In particular, the Treasury Report recommends that legislation be enacted to authorize regulators to engage in developing and testing out proof-of-concept technology projects.
The Treasury Report contains a number of recommendations relating to activity-specific regulation, in particular in respect of lending, payments and wealth management.
The Treasury Report contains recommendations in respect of marketplace lending, mortgage lending and servicing, student loans, and short-term installment lending (the New York state financial regulator has also recently issued a report on online lending, see our blog post here). The Treasury report suggests Congress codify the “valid when made” doctrine which would allow valid loans under the federal legislation to be assigned to third parties without triggering state interest rate limits. Legislation to do so is currently before the Senate. This could make it easier for marketplace lenders to assign or sell on their loans to state chartered entities.
The Treasury Report also recommends digitizing the mortgage process including the acceptance of digital promissory notes, e-signatures and automated property appraisals. This could decrease costs and increase the value of data for the mortgage lending industry. Data could also be valuable for student loans and short-term installment lending. The Treasury Report recommends the Department of Education improve data quality for student loans in order to increase transparency in portfolio performance and promote risk sharing by institutions. Such changes would make it easier to leverage advanced analytics in a lending context.
The Treasury Report calls on the Federal Reserve to set public goals and deadlines in conjunction with the work of the Faster Payments Task Force. In addition, the Treasury Report recommends additional coordination between the Federal Reserve, Treasury, and other financial regulators in order to improve payment security, particularly for smaller financial institutions.
The Treasury Report suggests harmonizing regulatory authority over wealth management. This would mean various agencies would have to exercise deference to the primary regulator, which the Treasury Report suggests would likely be the Securities and Exchange Commission.
Takeaways for Canada
Canada is currently considering many of the same issues and concepts as addressed in the Treasury Report. These include how best to modernize the financial services regulatory framework, the potential use of regulatory sandboxes, the tension between federal and provincial regulation and the desire for harmonization of regulation in certain areas, as well as the various data-related matters covered in the Treasury Report. For example, Canada has begun experimenting with a regulatory sandbox in the context of securities regulation. In addition, Canada is in the process of amending the Personal Information Protection and Electronic Documents Act (PIPEDA) to include mandatory breach notification requirements. Canada is also currently undergoing a consultation process on open banking involving a consideration of many similar issues to those addressed in the Treasury Report in respect of access by third parties to financial data (see our recent blog post on the topic for more information).
The emphasis in the Treasury Report on international engagement is also noteworthy from a Canadian perspective. For example, the drafters of the Treasury Report consulted with the Bank of Canada, Dutch National Bank, Monetary Authority of Singapore, European Commission, International Monetary Fund and UK Financial Conduct Authority. The Treasury Report recommends increased participation by regulators in international forums and standard-setting bodies to share experiences, best practices, as well as international cooperation within the private sector. This proposed approach is also consistent with the UK Financial Conduct Authority proposal for a Global Fintech Regulatory Sandbox and the recent formation of the Global Financial Innovation Network (which includes, on the Canadian side, the Ontario Securities Commission and the Autorité des marchés financiers, and on the US side, the Consumer Financial Protection Bureau).
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