Although it boasts one of the world's largest FinTech ecosystems, the US lags behind other major countries in providing a cohesive and consistent regulatory framework for FinTechs. Some US regulators have realised the need to act, launching initiatives with the aim of easing compliance burdens. But, the lack of coordination among federal as well as state regulators has spurred myriad conflicting statements, fragmented initiatives, and varying interpretations, all of which have inhibited the development of a comprehensive and uniform regulatory framework. This, as Ben Saul and Margaux Curie of White & Case explain, is the conclusion the US Government Accountability Office ('GAO') reached in its Financial Technology Report ('Report'). Ben and Margaux use the GAO Report as a springboard to evaluate FinTech regulation in the US, in terms of policy, implementation and future directions.
In March 2018, the GAO released the Report1, which evaluates the risks and benefits, customer protections, and regulatory oversight of FinTech products and activities. The Report comes two years after Congress requested an update on FinTech activities2, and builds upon previously GAO-conducted studies on the FinTech industry3. The Report explores FinTechs' risks and opportunities in four subsectors: payments; lending; wealth and financial advice; and distributed ledger technology ('DLT'), including blockchain technology.
While highlighting the many benefits FinTechs offer consumers, including lower costs, faster service and expanded access to credit, the Report points out that FinTech products and services generally pose risks that are similar, if not greater, than those posed by traditional banking products and that may not be sufficiently addressed by existing laws. Notably, the GAO stresses that the complex and uneven regulatory framework, fragmented across multiple state and federal agencies, fails to sufficiently address the unique risks presented by FinTech products - such as heightened privacy and cyber security concerns, fair lending discrimination, as well as unclear venues for consumer dispute resolution. The Report also demonstrates special concern regarding the use of DLT and the ostensible irreversibility of virtual currency transactions, including the risk of fraud associated with the use of virtual currency mobile wallets. Token sales, or ICOs, also pose significant investor risks, according to the GAO, and remain largely outside the regulatory scope when not deemed securities or commodities.
Under the US regulatory framework, FinTechs are subject to the overlapping authority and jurisdiction of no less than ten different federal agencies that are, in some capacity, involved in FinTech regulation. In addition, state financial services regulators and attorneys general play significant roles in connection with money transmission and other licensing as well as oversight of consumer protection. This dual system of federal and state regulation poses substantial challenges for FinTechs to identify, let alone comply with, the applicable legal and regulatory frameworks. The uncertainty and complexity of this regulatory environment hinders FinTech innovation by imposing compliance approaches that are often intricate yet still fraught with regulatory and legal risk.
Accordingly, the GAO underscores the need for interagency collaboration on FinTech issues, while also acknowledging the various guidance and initiatives that have already been undertaken both at the state and federal level. Notably, the Report praises steps taken by foreign jurisdictions to facilitate interactions between regulators and FinTechs through designated innovation offices, agency-led accelerator programs, and regulatory sandboxes. The GAO advises US regulators to consider implementing similar approaches to better understand FinTech markets and adopt an appropriate regulatory framework, as well as to help innovators develop products in limited risk environments.
Click here to download a full PDF version of FinTech regulation in the US: Policy, implementation, and future directions.
1 Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight, GAO-18-254 (Mar. 22, 2018), https://www.gao.gov/assets/700/690803.pdf
2 See Letter from Senators Jeff Merkley (D-OR), Sherrod Brown (D-OH), and Jeanne Shaheen (D-NH) to Gene L. Dorado, Comptroller General of the United States, requesting an updated report on the financial technology marketplace (Apr. 18, 2016), https://www.merkley.senate.gov/imo/media/doc/Letter%20to%20Gene%20L.%20Dorado%204.18.16.pdf
3 See Financial Technology: Information on Subsectors and Regulatory Oversight, GAO- 17-361 (Apr. 19, 2017), https://www.gao.gov/; Financial Technology: Information on Subsectors and Regulatory Oversight, GAO-17-806T (Sept. 12, 2017), https://www.gao.gov/assets/690/684187.pdf. See also Person-to-Person Lending: New Regulatory Challenges Could Emerge as the Industry Grows, GAO-11-613 (Jul. 7, 2011), https://www.gao.gov/new.items/d11613.pdf
This article was first published in Payments & FinTech Lawyer, June 4, 2018.
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