The five federal banking agencies (Federal Reserve, Bureau of Consumer Financial Protection, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency – collectively Agencies) have issued a joint statement on the role of supervisory guidance.

The statement says that supervisory guidance does not have the force and effect of law, and that the Agencies do not take enforcement actions based on supervisory guidance. However, the Agencies state that supervisory guidance outlines the Agencies’ “supervisory expectations or priorities and articulates the [A]gencies’ general views regarding appropriate practices for a given area.” For example, supervisory guidance often contains examples of practices that the Agencies “generally consider consistent with safety-and-soundness standards or other applicable laws and regulations.”

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After lengthy litigation on which we have commented extensively (see here and here), the US Court of Appeals for the District of Columbia Circuit issued an en banc opinion vacating and reversing in part a decision of a panel of that court, and holding that the Bureau of Consumer Financial Protection (Bureau, and formerly the CFPB), was not unconstitutionally structured. PHH Corp. v. Consumer Financial Protection Bureau, 881 F.3d 75 (DC Cir. 2018). For reasons not directly relevant to the instant matter, that litigation has ended and the Bureau has ended its administrative proceedings against PHH.

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The UK Financial Conduct Authority (FCA) issued a press release on August 7 announcing that it has joined 11 other financial regulators from around the world to create the Global Financial Innovation Network (GFIN), building on its proposals earlier in the year to create a “global sandbox.” The network is intended to provide fintech firms a more efficient way to interact with regulators as they test new ideas across different markets and to create a new framework for regulators to cooperate on areas of innovation. This announcement continues a regulatory trend of being more hospitable to fintech innovation, as we have previously discussed.

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We write frequently about the SEC’s and the CFTC’s focus on cryptocurrencies, but potential issuers should also be alert to other oversight, including possible enforcement actions, from other regulators as well. Indeed, state Attorneys General are playing a greater role in evaluating whether the mining and use of cryptocurrencies works to the disadvantage of consumers and small businesses. These state enforcement and regulatory officials are becoming ever more powerful. Furthermore, some of them may seek to expand the scope of their authority by pushing the “round peg” of “virtual” financial technology offerings into the “square hole” of outdated “physical only” state statutes and rules.

Meetings of the Conference of Western Attorneys General (CWAG) in New Mexico last week and of the Republican Attorneys General Association (RAGA) (Rule of Law Defense Fund) in California this week included panel discussions of cryptocurrency issues that are now before the Attorneys General and senior staff. Accordingly, fintech companies that intermediate cryptocurrencies should be aware of the increased risk in conducting these activities in particular states.

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Prior to the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), bank holding companies and nonbank financial companies supervised by the Federal Reserve with $50 billion or more of total consolidated assets were subject to enhanced prudential standards (SIFIs). The EGRRCPA raised that threshold to $100 billion or more of total consolidated assets, and the SIFI threshold will eventually increase to $250 billion in total consolidated assets.

Zions Bancorporation (Zions) has around $66.5 billion in total consolidated assets and, prior to EGRRCPA, was a SIFI. Post-EGRRCPA, Zions is no longer a SIFI, which one would think would be the end of the story and Zions could walk away a happy non-SIFI bank.

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On July 6, the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (together, the Agencies) issued an interagency statement (Statement) regarding the impact of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (the tongue-tying EGRRCPA), which we previously summarized. The new law amended the Dodd-Frank Act to streamline certain of its systemic regulation requirements, and provide a modest level of relief for midsized banks and community banking institutions. The Statement addressed some of the immediate impacts of EGRRCPA and the Agencies’ responses to those provisions that took effect immediately. The Federal Reserve Board also issued a separate conforming statement addressing the impact of EGRRCPA on bank holding companies subject to its supervision (FRB Statement).

Among other things, EGRRCPA increases the Dodd-Frank Act enhanced prudential supervision threshold for bank holding companies with $50 billion in total consolidated assets by exempting bank holding companies with total consolidated assets of less than $100 billion immediately upon enactment (May 24, 2018), and raising this threshold to $250 billion 18 months after the date of enactment (November 25, 2019). EGRRCPA also allows the application of any enhanced prudential standard to bank holding companies with between $100 billion and $250 billion in total consolidated assets.

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The UK Financial Conduct Authority (FCA) issued a press release on July 3 announcing the latest cohort of firms accepted into its regulatory sandbox. Twenty-nine firms were accepted, which represents the largest cohort to date. The sandbox, now in its fourth year, allows firms to test their products and services in a controlled environment, prior to use in the open market where they would be subject to the full suite of regulations and associated costs.

The United Kingdom is a leader worldwide in supporting growth and innovation in the world of financial technology. Similar efforts are occurring in the United States, but lag behind UK developments; as we reported just three months ago, Arizona became the first state in the United States to enact a law to create a “Fintech Sandbox.”

Focus of cohort

The focus of this year’s UK Fintech Sandbox cohort appears to be on the capital-raising process, with a large number of applicants seeking to increase the efficiency of the process and improve access to capital, including six firms seeking to automate the issuance of debt or equity. Other notable innovations among the UK cohort include the use of distributed ledger technology (over 40% of the cohort), firms offering automated or “robo” investment advice, and the continued increase of firms seeking to use technology to streamline the AML/KYC process.

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Since taking on the role in November 2017, Comptroller of the Currency Joseph Otting has been relatively circumspect regarding his views on the banking industry, bank regulation, and bank regulatory reform. In testimony on June 14 before the Senate Committee on Banking, Housing, and Urban Affairs, Comptroller Otting provided the clearest insight to date about his views on the federal banking system and the role of bank regulation.

In his testimony, Comptroller Otting first discussed risk in the banking system and the OCC’s “supervision by risk” approach, noting the following areas of heightened risk:

• Elevated credit risk due to eased credit underwriting, increased commercial real estate concentration limits, and policy exceptions that create a higher level of concern
  
• Elevated operational risk created by cybersecurity threats and third-party relationships, including risks created by consolidation in the fintech industry, which has led to a limited number of providers servicing large segments of the banking industry
  
• Elevated compliance risk due to Bank Secrecy Act (BSA) requirements, the new FinCEN beneficial ownership rules, and new technologies that attempt to increase customer convenience and access to financial products and services, and the need for banks to better manage implementation of regulatory changes in consumer laws

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It’s here. The Federal Reserve Board and the Federal Deposit Insurance Corporation have released a proposed rule (Proposed Rule) that would make important modifications to Section 13 of the Bank Holding Company Act, commonly known as “the Volcker Rule.” The Proposed Rule is intended to address the “complexity” of the Volcker Rule, which has created “compliance uncertainty” and, in the words of Fed Chairman Jerome Powell, to “allow firms to conduct appropriate activities without undue burden and without sacrificing safety and soundness.”

The remaining three agencies responsible for implementation of the Volcker Rule (Office of the Comptroller of Currency, the US Securities and Exchange Commission, and the Commodity Futures Trading Commission) are expected to release their proposals shortly. Other than agency-specific variations, the proposal released by each of the five agencies is expected to be the same. The comment period for the Proposed Rule will be 60 days from the date of publication of the proposal in the Federal Register.

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Just over two months after the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S 2155), the House voted 258-159 (with 33 Democrats voting “yea”) to pass S 2155 without amendments. S 2155 was quickly signed into law by President Donald Trump.

Until recently, S 2155 faced an uncertain future in the House. In June 2017, the House had passed its version of financial regulatory reform (HR 10, better known as the Financial CHOICE Act of 2017 (CHOICE Act). The CHOICE Act was a relatively comprehensive effort to reform the Dodd-Frank Act. Because it included a large number of provisions that would not attract broad bipartisan support, however, the CHOICE Act never was seen as having much, if any, chance of passing the Senate.

When S 2155 was passed, House Financial Services Committee Chairman Jeb Hensarling (R-TX) signaled that the House was not inclined to pass it without incorporating at least some elements of the CHOICE Act. In the interim, however, Mr. Hensarling and other Republicans were persuaded to allow a vote on S 2155 without further amendment, with the promise that additional provisions of the CHOICE Act could be brought as a separate bill or bills, which resulted in House passage of the bill.

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