The French and New York Financial Regulators Partner to Boost Cross-Border Fintech Cooperation
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The New York Department of Financial Services ("NYDFS") and the French Autorité de Contrôle Prudentiel et de Résolution ("ACPR") signed a Memorandum of Understanding ("MOU") to position New York and France as innovation hubs for financial services technology (Fintechs), dated June 3, 2020.1 Through this new partnership, the two financial regulators aim to encourage cross-border activity and investment opportunities in both US and French markets while upholding robust consumer protections.
Effective immediately, the MOU specifically provides that the NYDFS and the ACPR will collaborate to achieve the following objectives:
- Refer innovative businesses to one another for potential market entry;
- Improve cross-border channels of communication and information exchange regarding regulatory, supervisory, and policy issues related to Fintechs;
- Ensure Fintechs in both jurisdictions receive equal levels of support, including access to dedicated contact persons and assistance with regards to each jurisdiction's regulatory framework and licensing process; and
- Share regulatory and supervisory expertise as well as industry best practices.
Although non-binding, closer collaboration between both authorities is expected to create an environment conducive to responsible financial innovation in their respective markets.
Of note, the MOU is the first cooperation agreement on Fintech signed by the ACPR with a US regulator, and supplements existing Fintech partnership agreements signed with other non-European countries, including with the Monetary Authority of Singapore and the Hong Kong Monetary Authority.
The MOU also confirms the NYDFS's commitment to entrench its status as a leading financial innovation hub. In 2019, the NYDFS announced that it created a new Research and Innovation Division designed to track emerging financial technologies and strengthen New York's standing as the center of financial innovation. Shortly thereafter, the NYDFS became the first US state agency to join the Global Financial Innovation Network ("GFIN") along with other international financial regulators to support cross-border regulatory harmonization in financial services. Most recently, the New York regulator unveiled its DFS FastForward feedback program through which Fintech companies will be able to submit questions and consult with the NYDFS directly on specific compliance issues.
Importantly, the MOU creates a collaborative structure through which Fintechs can better navigate and understand the differences in regulatory frameworks and legal implications in each of these jurisdictions.
Fintech Entry into the US Market: Navigating a Complex Regulatory Framework
A Dual, Fragmented State-Federal Regulatory Framework
The US is a leading, international center for financial services and offers extensive, new market opportunities for non-US Fintechs that are looking to expand their product offerings to this region. The US regulatory landscape, however, remains deeply fragmented and lags behind other major countries in providing a cohesive and consistent regulatory framework for Fintech companies due in large part to the historical tension between local and national powers.
Specifically, Fintechs operating in the US are not subject to a Fintech-specific regulatory framework enforced by a single, centralized financial regulatory body. Rather, Fintech firms in the US are often subject to a patchwork of federal and state laws and regulations based on the activities in which they engage in, the location in which they conduct such activities and the location in which their customers reside.
For instance, Fintechs that provide payment products and services, including by facilitating money transmission between businesses or consumers, are subject both federal and state requirements:
- At the federal level, companies conducting money transmission activities must generally register as money services businesses ("MSBs") with the US Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") and comply with the US Bank Secrecy Act and any related anti-money laundering rules and regulations ("AML/BSA"), including applicable customer due diligence, suspicious activity reporting, and recordkeeping requirements. MSBs are subject to periodic examination by the Internal Revenue Service, acting via delegated authority from FinCEN, for compliance with AML/BSA requirements.
- At the state level, each US state and the District of Columbia, with the notable exception of Montana, maintains its own licensing, supervision, and enforcement regime applicable to money transmitters, which governs any business that offers payment services to a state resident, regardless of whether such business maintains a physical presence in most states. While states have adopted differing interpretations and exemptions as to what constitutes "money transmission" (which may or may not include virtual currency activities, generally depending on each regulator's interpretation what constitutes "money" or a "monetary equivalent") state licensing requirements focus on consumer protection, safety and soundness and adherence to AML/BSA requirements. Licensed money transmitters must comply with periodic reporting obligations covering financial statements, permissible investments adequacy, branch and agent listings and transmission volume activity. Licensees must also undergo annual financial examinations conducted by either multistate supervisory teams or individual states to ensure they operate in a safe and sound manner and comply with applicable laws and regulations. Money transmitters that do not comply with supervisory expectations may face state administrative, civil and criminal enforcement and, in some cases, federal enforcement action.
In addition to federal and state registration and/or licensing frameworks, Fintechs must comply with a range of federal consumer protection laws that apply to providers of consumer financial products and services. Such laws are administered and enforced by the Consumer Financial Protection Bureau ("CFPB"). The CFPB also has authority to enjoin the use of unfair, deceptive, or abusive acts or practices generally. Similarly, the Federal Trade Commission ("FTC") has broad jurisdiction to prohibit unfair and deceptive acts or practices in or affecting commerce across industry sectors, and has used this authority against Fintechs with insufficient data privacy and security practices, among other items.
To the extent that Fintech companies intend to engage in other regulated activities, such as foreign exchange, lending, brokerage, investment advice, or robo-advisory services, they may be required to obtain additional federal registration and/or state licenses, as well as to comply with the laws and regulations specific to these product offerings.
Recent Developments and Looking Forward
The fragmentation of the US financial regulatory system, characterized by multiple overlapping regulators and a dual state-federal regulatory framework, has drawn sharp criticism in recent years as a potential barrier to entry and innovation in the US market. The myriad of potentially applicable federal and state regulations to any single Fintech or activity creates difficulties for earlier stage companies from expanding to the US due to their inability to absorb the costs and burdens associated with conducting regulated activities there.
Cognizant of the challenges that the US regulatory framework presents for Fintech firms, federal and state regulators have undertaken a number of initiatives to improve coordination among themselves and with their foreign counterparts. The CFPB, for instance, is a member of the GFIN alongside the NYDFS. Regulators have also taken steps to increase communication with Fintech firms by setting up innovation offices within their organizations to help firms better understand how they view emerging technologies and conduct outreach initiatives.
At the state level specifically, the Conference of State Bank Supervisors ("CSBS"), which represents the financial regulators from all 50 US states and the District of Columbia, has been spearheading an effort to streamline multistate licensing and supervision for nonbank companies, including money transmitters. A number of states, such as Arizona, Hawaii and Utah, have also launched regulatory sandboxes where Fintechs can test new products in a controlled environment to gauge their viability before rolling out to the entire market.
Similarly, at the federal level, the Office of the Comptroller of the Currency ("OCC"), which primarily supervises national banks, announced in July 2018 that it would issue special-purpose national bank charters to non-depository Fintech companies (the so-called "Fintech charter"). Fintechs chartered by the OCC would be subject to federal supervision and permitted to engage in the business of banking, including taking deposits, lending money or paying checks, across the US without the need to obtain state licenses and meet state-specific regulations and standards. The OCC's charter initiative, however, was promptly met with pushback from the CSBS and the NYDFS and remains on hold until resolved in court.2 Given the uncertainty created by pending litigation, no company has made substantial progress towards obtaining a Fintech charter. The OCC, which recently underwent a change in leadership, nevertheless reaffirmed its strong commitment to this initiative and hinted that another other special-purpose federal charter specific to payments may be forthcoming. The Federal Deposit Insurance Corporation, on a positive note, recently did grant deposit insurance to Square, Inc., a prominent payment processing and lending Fintech, seeking to form a first-of-its kind Fintech bank in the US.
Fintech Entry into the French Market
There is no legal framework in France dedicated to Fintechs. Contrary to some other European regulators, the French regulators, the Autorité des marchés financiers ("AMF") and the Autorité de contrôle prudentiel et de résolution ("ACPR") have adopted the Soundbox system or "proportional regulation", as opposed to the "sandbox" system. The French approach thus consists of applying the same regulatory system to traditional banks and start-ups in the finance industry. In this system, the application may be adapted according to the size of the company or the risks it incurs.
A multitude of start-ups are developing every year in France, offering various payment, insurance, financing, savings, investment or financial management services in B2B and B2C businesses.
Depending on the type of services offered, Fintechs may be subject to one or more existing regulatory statutes in France and, as the case may be, fall within the jurisdiction of the AMF and/or the ACPR.
Some of these statutes are harmonized at the European level with regard to approval and organizational requirements:
- Insurance and insurance intermediation activities;
- Credit and deposit banking activities;
- Payment and e-money activities;
- Investment services activities; and
- Financial management activities (private banking or collective management).
Other statutes are purely national, although European-level texts may be in preparation (e.g., crowdfunding). For example:
- Crowdfunding platforms;
- Credit intermediaries; and
- Digital asset service providers.
In any event, whether or not the applicable regime comes from a European-level regime, some purely national rules will apply to companies operating in France, such as those on money laundering and terrorist financing, banking and financial canvassing, consumer law, contract law, personal data, advertising law, competition law, etc.
In view of the complexity of the applicable regulations, and in order to promote the establishment of innovative companies in France, the French regulators have each created a Fintechs division, as well as a joint unit for the two authorities:
- In 2016, the AMF created a "Fintech, Innovation and Competitiveness" division and the ACPR created a "Fintech and Innovation" division. In both cases, the willingness of regulators is to support innovative projects to ensure the best legal security for their operations, and to adapt European or French regulations to the new challenges of the financial sector.
- The two authorities have also created the Fintech Forum, which brings together the actors of the Fintechs ecosystem, the French Treasury Department and the two authorities. The purpose of this body is to work on changes to ACPR and AMF doctrines or the development of new European or national regulatory framework.This body also provides a forum for exchanging views on the new challenges for financial regulation and supervision linked to sectoral innovations (trading, payment, banking, insurance) or more cross-sectoral innovations (blockchain, innovative use of data, artificial intelligence, connected objects, digital identity).
It should also be noted that, in the context of Brexit, the French authorities have created the so-called "two-week ticket" procedure allowing applications for approval to be processed in France on a simplified and accelerated basis for Fintechs, with an English-speaking contact person. This includes all financial firms based in the UK, including US firms that have entered the European market via UK-based subsidiaries.
The US regulatory framework continues to present significant challenges to foreign Fintechs looking to expand overseas. The same conclusion may be drawn from the French regulatory framework although it is less fragmented than the US framework in the absence of a dual banking system.
While a cohesive strategy between US federal and state regulators has yet to emerge, the MOU provides a welcome step forward on the international front to address the need for greater interagency collaboration to help Fintechs navigate regulatory differences in both jurisdictions.
1 NYDFS, Memorandum of Understanding on Fintech Cooperation, https://www.dfs.ny.gov/system/files/documents/2020/06/mou_20200526_acpr_fintech.pdf.
2 Please see our prior alert for more details.
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