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Supporting Responsible Innovation: Lessons from the OCC

Post on: June 17, 2016 | Brittany Burns | 0


I recently had the opportunity to attend the Women in Housing and Finance’s 2016 Annual Symposium, titled “Transformation in Financial Services: The Impact of Financial Technology (FinTech).” The symposium featured participants from all areas of financial services and financial technology, ranging from regulators, general counsel, law firms and banking industry leaders.

One of the most thought provoking panels was a discussion between Jo Ann Barefoot, Senior Fellow at the JFK School of Government at Harvard University and Amy Friend, Senior Deputy Comptroller and Chief Counsel at the Office of the Comptroller of Currency (OCC).

Mrs. Friend discussed the Office of the Comptroller’s new whitepaper, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. The whitepaper defined the OCC’s commitment to “making certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation along with the supervision that supports it.” The panel highlighted the cultural shift within the OCC to be more receptive to innovation while still protecting consumers and customers.  Specifically, the agency formulated eight principles to guide the development of its framework for understanding and evaluating innovative products, services and processes that OCC-regulated banks may offer or perform. These principles include:

  1. Support responsible innovation
  2. Foster an internal culture receptive to responsible innovation
  3. Leverage agency experience and expertise
  4. Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers
  5. Further safe and sound operations through effective risk management
  6. Encourage banks of all sizes to integrate responsible innovations into their strategic planning
  7. Promote ongoing dialogue through formal outreach
  8. Collaborate with other regulators

Throughout the conference, panelists highlighted the benefit of developments in the FinTech area, especially its ability to make financial services available to those who are traditionally underserved. However, regulators have reason to be wary. As the OCC’s paper points out, the financial crisis is evidence that not all innovation is positive. While regulators have a duty to protect customers and investors, they also commit in their mission statements to provide “fair access to financial services”1 and “market integrity.”2 Both of these initiatives are only possible with innovation and advances in financial technology.

FINRA should consider adopting a similar responsible innovation initiative as the OCC, using the OCC’s principles as a guide to developing their own. In order to protect investors and provide market integrity, markets need to be as transparent as possible. This is an issue in private placement markets, which do not have the benefit of the publicly traded markets, liquid stock, and yearly disclosures. When companies develop technologies that provide insight into these markets, FINRA should be critical of the risks but receptive to the possibilities.

The biggest principles that FINRA should look to tackle first are “Fostering an internal culture receptive to responsible innovation” and “Promoting ongoing dialogue through formal outreach.” An innovation initiative has to start from the top, reinforcing the importance of investor protection, but training employees to be open to considering new and innovative technologies. At the OCC, Friend noted, training is being implemented to allow employees to join in on the dialogue regarding innovation. Employees should start by asking, “Is this legally permissible?” If the answer is yes, a deeper dive into the technology or process should be done, examining questions such as “what are the policy implications? What do we need to know about this company? What are their expertise or business plans?” Regulators can be quick to say no when they don’t fully understand the implications of new technology, but this outdated and stubborn stance hurts both innovators and investors alike.

Richard Ketchum’s remarks at the 2016 FINRA annual conference provide a ray of hope that the self-regulatory agency’s culture is moving toward being more receptive. Ketchum suggested that FINRA must “be committed to fully understanding the industry,” through engagement with the firms that the agency is tasked with regulating.3 As Chairman Ketchum correctly noted, understanding “what makes the industry tick,” will allow FINRA to “see around corners and properly identify and address new regulatory risks before they harm investors.”4

In addition, FINRA should look to promote ongoing dialogue through formal outreach. FINRA has a successful and impressive investor knowledge portal, however, outreach to the actual regulated broker-dealers is lacking. There needs to be a shift in internal culture to one that provides educational materials, clear rules and expectations, and only punishes those who negligently or purposefully do not meet the clearly defined expectations. FINRA focuses significantly on how much they have collected in fines on broker-dealers, noting in the “About FINRA” section that they levied $191.7M in fines against broker-dealers in 2015.5 However, many of these fines are against broker-dealers who believe they are following vaguely written rules. To encourage innovation and protect investors, FINRA should be open to requests for clarification from the public and should have initiatives focused on active outreach to clarify areas where the agency sees the most misinterpretation of the rules. Again, Chairman Ketchum echoed the need for ongoing dialogue in his conference remarks when he stated, “Each day we should count it an equal triumph when an examination or our market surveillance program identifies issues and provides guidance that allows our firms to do the right thing by their clients without the need for an enforcement action.”6

Regulators who are averse to innovations within the financial industry are doing a disservice to both the markets and investors/consumers. If regulators remain monolithic, the industry will move around them. Innovation is like water, it will find its way into the industry whether regulators want it there or not. By being receptive to innovation, regulators can work with innovators to ensure that they are acting in a compliant and fair manner, and innovators can help develop systems that help regulators protect investors. In contrast, if regulators remain averse to innovation, their heavy scrutiny will push out the companies seeking to help investors and consumers in a compliant and fair manner and leave only those who are willing to move around the regulator, potentially promulgating more fraud on the markets and injuring investors. To avoid this unwanted consequence, FINRA should look to the OCC as a guide and follow in their footsteps of fostering a receptive culture to responsible innovation.

1 Office of the Comptroller Mission Statement (“To ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.”)
2 FINRA Mission Statement (“FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.”)
3 Richard Ketchum, Chairman, FINRA, Remarks from the 2016 FINRA Annual Conference (May 23, 2016) ("Ketchum Remarks").
4 Id.
5 About FINRA, Financial Industry Regulatory Authority (last accessed on May 22, 2016), available at http://www.finra.org/about.
6 Ketchum Remarks.

Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.

Disclaimer: WealthForge provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.

About author

Brittany Burns

Brittany is a graduate of the University of Richmond School of Law and frequently contributes thought leadership materials that are used by regulators, clients and other attorneys in the securities field.
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