OCC Introduces Framework for Responsible Innovation

FinTech  •  OCC

Thumbnail for 1324On March 31, 2016 the Office of the Comptroller of the Currency (OCC) issued a white paper setting forth its vision of responsible innovation, and signaling its increasing involvement in the financial technology (Fintech) space.  The white paper, titled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective,” lays out eight principles of how the agency intends to improve its understanding and evaluation of financial technology products and services.  Striking a largely optimistic tone, the white paper focuses on responsible innovation, which the OCC defines as the “use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank’s overall strategy.”  The OCC notes that the Fintech market has presented challenges for traditional financial institutions, but urges that “banks and nonbank innovators can benefit” from “strategic and prudent collaboration.”  While the paper presents the growth of innovative financial technology as holding much promise for both consumers and the banking industry, it also warns that “innovation is not free from risk” and “effective risk management is essential.”

The principles advanced by the OCC communicate to the industry the agency’s desire to better understand and support responsible and innovative products, services, and processes.  Those principles include:

  • Supporting responsible innovation by providing more streamlined and effective ways to give regulatory guidance and allow institutions to communicate with the agency, including potentially establishing a centralized office on innovation.
  • Fostering an internal culture within the OCC that is receptive to responsible innovation, including evaluating its own policies and procedures, roles and responsibilities, training, and expertise gaps.
  • Leveraging the OCC’s experience within the financial system and growing its expertise in emerging technologies.
  • Promoting ongoing formal dialogue with all stakeholders (bank, nonbank innovators, and consumer groups) through workshops, meetings, and “innovator fairs” to discuss regulatory requirements and supervisory expectations.
  • Collaborating and coordinating with other regulators so innovative ideas are treated consistently.

The principles also set forth the OCC’s expectations of financial institutions considering new or improved financial technology offerings, either through their own platform or in partnership with nonbank innovators.  These principles include:

  • Encouraging responsible innovation that provides access to financial services and fair treatment of consumers.  While the white paper warns that “[b]rick-and-mortar branches are a stabilizing force in low-income neighborhoods, and innovative technology should not be seen as a substitute for physical presence in those communities,” the paper describes at length how innovation may hold “great promise” for underserved communities and “broaden access to financial services.” The OCC further notes that it may promote awareness of alternative activities that could qualify for Community Reinvestment Act (CRA) consideration.
  • Furthering safe and sound operations through effective risk management, including the expectation that financial institutions will mitigate the risk of offering new technologies by following existing guidance related to strategic planning, new products and services, models, cybersecurity, operational risk, and managing third-party relationships.
  • Encouraging banks to integrate responsible innovation into their strategic planning, and reminding banks that any pursuit of emerging technology should align with customer needs, the bank’s strategic plan and strategic planning criteria, and the bank’s risk management capabilities.

The white paper concludes with a request for written submissions concerning the subject of the paper and a set of questions along the same topics.  The OCC’s focus on Fintech may be a welcome development for many stakeholders – the OCC’s framework suggests an optimistic view of the role and potential of financial technology, the OCC may be able to increase agency expertise and coordinate federal agency response to innovative products, and increased transparency and guidance will provide a level of certainty thus far lacking within the space.   LenderLaw will continue to follow developments in this area, including reporting on the OCC’s upcoming June 23, 2016 forum on responsible innovation.

Download PDF

Comments are closed.