Fintech Disruptors And Regulators Can Find Common Ground, But Laws Are Laws

CFPB Director Richard Cordray tells Money 20/20 audience about his agency’s programs to encourage product innovation, within limits.

The government’s best-known consumer watchdog says fintech should be encouraged to grow, but also needs to watch what it’s doing.

CFPB Director Richard Cordray told the opening night general session of Money 20/20 in Las Vegas, NV, on Sunday that his agency is out to ensure both access and innovation. He believes fintech can provide consumers with more value and better service while at the same time staying within the protections the law provides.

He pointed to mobile banking as one example, because of its ability to bring financial services to urban and rural banking deserts, and to the creative development of prepaid cards and similar services as another.

The CFPB director told the audience of fintech developers and executives from startups and major players alike that although there have been CFPB enforcement actions against some providers in the fintech space, these actions should not be misread or overread.

Many new products cut across regulatory lines, he said, and the CFPB which is in the somewhat distinct position of regulating products as much as providers is not looking to punish anyone for raising unforeseen issues and areas of the law as they develop products and services.

The enforcement actions the CFPB has taken, the director said, were meat and potatoes issues, such as promising consumers one thing and delivering something else or not delivering at all.

You do that at your legal peril, he warned.

Catalyst For Change

On the other hand, Cordray said the CFPB this week will roll out its first report from Project Catalyst, its initiative with financial services providers and developers to foster innovative products in a range of areas, including payments, loan underwriting, money management, and encouraging savings.

The CFPB director also pointed to the bureau’s no action letter policy that allows companies to argue to bureau staff that a new product has great potential and little risk. Convince the bureaucrats, and it will issue a letter that says the bureau won’t move against the company for a defined period of time.

We realize companies might be uncertain about novel products that don’t fit neatly into our existing structures, Cordray said.

The possibilities are staggering, even revolutionary, maybe especially for the unbanked and underbanked consigned to live in a cash economy. Some of the most exciting products are for them, whether they choose to join the banking system or not, Cordray said.

Presidential Politics

Fintech also made its way into presidential politics at Money 20/20.

The assumption that Hillary Clinton would win on Nov. 8 drove the discussion in the session titled The Impact of the U.S. Presidential Election on the Financial Services Regulatory Landscape.

The panel comprised Tim Pawlenty, the former Republican governor of Minnesota who now heads up the Financial Services Roundtable trade group for big banks in Washington, DC; Neil Wolin, former deputy Treasury secretary and White House economic adviser for President Obama; and moderator Raj Date, who served as the top officer of the Consumer Financial Protection Bureau in its formative days before Richard Cordray officially became director.

Pawlenty conceded that Clinton was in a commanding position and observed that Clinton’s interest in financial services regulation expanded as the challenge from Vermont Sen. Bernie Sanders mounted.

Her agenda had mostly been eliminating carried interest and shadow banking and just what that is, is yet to be determined but as the primaries got more robust she expanded to include not changing Dodd-Frank, some sort of risk fee on large banks and other financial institutions, a tax on high-frequency trading, and being more aggressive on executive compensation at financial institutions, Pawlenty said.

Wolin, meanwhile, said, Hillary is strong on consumer protection, and that is unlikely to abate, especially in the wake of what happened with Wells Fargo. In fact, it’s likely to intensify.

Of Sandboxes And Sea Legs

Of course, presidents can only do so much on their own, and the possibility of a Democrat-controlled Senate could have a major impact on regulators, Wolin said. Although agencies like the NCUA are independent, their boards are presidential appointees and would be among the 4,000 or so jobs the new administration will be handing out, Wolin said.

The CFPB was pointed to as an agency that is not only independent of congressional funding but also run by a single director with no bipartisan board oversight. The U.S. Court of Appeals in Washington, DC, recently ruled that unconstitutional but did not order the bureau to shut down.

The Supreme Court, down one member and prone to 4-4 votes, might or might not take up that case. A GOP-controlled Senate would likely continue the governmental gridlock, and the panelists noted beyond that, a House likely to remain in Republican hands means politics as usual could continue well into the future.

I see the status quo continuing unless something really bad happens, Pawlenty said.

But as far as fintech goes, Pawlenty foreshadowed what Cordray said later in the evening about how the existing regulatory framework doesn’t always neatly encompass the fast-developing new technologies and companies that deliver them.

As you think about established versus emerging parts of the industry, you have to think to what extent current regulations can apply, asked Pawlenty, whose Financial Services Roundtable includes BITS, a technology policy division that includes banking associations, major vendors such as FIS and Fidelity, and community financial institution advocates CUNA and the ICBA. Do you apply those, or do you take a sandbox approach until a product gets its sea legs? At what point do you decide there doesn’t need to be any special treatment?

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October 23, 2016

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