FinTech in Focus
Political and Regulatory Developments
We’ll start in the U.S., where the Consumer Financial Protection Bureau released roughly 1,600 pages of proposed rules applicable to the payday loan industry. Happy summer reading! Interestingly, the bureau reports (P. 989) that the proposed rules would negatively impact, if not eliminate, revenue from 70 percent of storefront payday lenders. The bureau “forecasts that a large number of storefronts would close if the proposed rules were adopted, but that consumers’ geographic access to stores would not be substantially affected in most areas.” For FinTech firms operating in this field, the preliminary reaction was largely positive as platforms are able to adjust and comply with the new rules faster than legacy institutions. This reaction should not come as a surprise given prior remarks by CFPB Director Richard Cordray. Of course, like all regulation, the devil is in the details.
Separately, the New York State Department of Financial Services has expanded its inquiry into online lending activities, sending letters to 28 platforms. According to Reuters, which obtained a copy of the letter, the agency demanded "immediate compliance with New York licensing requirements for debt collection, money transmission and mortgage lending activities.” Meanwhile, the U.S. Department of Justice (DOJ) "has an eye on" the online lending industry as well, according to Leslie Caldwell, head of the DOJ’s criminal division. "I'm not saying ... that we've uncovered a massive fraud, but just that there's a potential for things to go awry, like when underperforming loans were being sold in residential mortgage-backed securities," Caldwell said.
And lastly, the federal Office of the Comptroller of the Currency continues to release comments submitted in response to the comptroller’s white paper covering responsible innovation. You can view our submission here.
Questions about the peer-to-peer lending space are also being raised in the UK. Andrew Tyrie, a member of Parliament and chairman of its treasury committee, submitted letters to the Financial Conduct Authority and Bank of England questioning whether consumers would benefit from further regulation of the peer-to-peer lending market and whether regulators are providing proper oversight, given potential systemic risk concerns. Responses to both letters will be made public, according to Tyrie.
In late May, France’s Financial Markets Authority announced the formation of its Fintech, Innovation and Competitiveness division within the Regulatory Policy and International Affairs Directorate. The division, which began operations on June 1, is headed by Franck Guiader, a former employee at Lazard Bank and BNP Parisbas. No reaction yet from the France FinTech Association. Separately, France has signed a memorandum of understanding with South Korea, allowing the countries to share information and provide support to FinTech firms operating in each country.
In Germany, FinTech Group AG and South Korea’s Finotek signed a cross-licensing deal, marking the first European-Asian FinTech joint venture.
At the European Union level, the European Parliament held a nonbinding vote on a resolution that called for a light-touch approach to the regulation of virtual currencies and the creation of a task force overseen by the European Commission to monitor virtual currencies and “build expertise in the underlying technology of virtual currencies.”
Meanwhile, the European Securities and Markets Authority (ESMA) published a discussion paper on the application of distributed ledger technology (DLT) to securities markets. According to the 34-page report, the ESMA finds it “unlikely that the DLT would be deployed across all market segments and activities simultaneously. In a step-wise scenario, the DLT would need to interoperate with existing market infrastructures and the attendant systems, at least in the short to medium term. In addition, separate ledgers might be used for different asset types and these ledgers will need to interact with one another. This raises a number of technical challenges."
The Monetary Authority of Singapore (MAS) has been active recently with the release of proposed guidelines for a “regulatory sandbox.” The consultation paper notes that while financial institutions are free to launch their own innovations without MAS guidance, and provided they adhere to regulatory requirements, “in circumstances where it is less clear to FIs whether a new financial product, service or process (the ‘FinTech solution’) complies with legal and regulatory requirements, some FIs may err on the side of caution and choose not to pursue the solution. This outcome is undesirable as promising innovations may be stifled and this may result in missed opportunities.” Separately, the authority's chief FinTech officer, Sopnendu Mohanty, announced 100 "problem statements"— a list of financial problems that can be solved by technology. FinTech firms have the opportunity to propose solutions to them by the end of July and demonstrate those potential solutions during Singapore’s FinTech festival in November.
Japan's Financial Services Agency established a Payments Council on Financial Innovation this month, with members expected to set up a framework “to drive forward reform on payment systems and take actions for FinTech innovation with strong resolution to improve customers’ convenience and enhance the international competitiveness of our economy.” Separately, Japan's Ministry of Economy, Trade and Industry, in partnership with Nomura Research, published findings from a survey covering blockchain technology and it’s potential (the figure below provides the estimated size of the market which blockchain technology can be effectively applied). As to blockchain’s challenges, the report finds: “Theoretical verification has yet to be conducted, and application of blockchains to actual services has not been demonstrated sufficiently. The background ideas of blockchains are completely different from those of existing systems, and methodologies for ensuring service levels and security have not been established. Therefore, detailed discussions are required both in terms of technologies and in terms of business.”