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OCC builds on innovation overtures

Looks like it’s still “beginning of the beginning”

Federal regulators walk something of a tightrope between innovation and supervision. The Comptroller's Office calls the midpoint "responsible innovation." Federal regulators walk something of a tightrope between innovation and supervision. The Comptroller's Office calls the midpoint "responsible innovation."

It’s not exactly gone platinum, but with over 20,000 downloads since it was published in late March, the Comptroller’s white paper on innovation can at least claim best-seller status.

A panel of officials from the Office of the Comptroller of the Currency batted cleanup at last week’s agency forum, “Supporting Responsible Innovation In The Federal Banking System.” Much insight, opinion, and input had been gathered from multiple sectors all day. [See links to related coverage at the end of this article.]

The panel reported the deep interest in innovation suggested by the demand for the white paper. Panel members represented the core groups that are developing OCC policy on innovation in fintech and additional areas. They were key players in producing the white paper itself, and are the team that has been poring over the comments filed on the paper by banks, financial trade associations, consumerists, fintech firms, and others.

Clearly, much more work remains to be done, amid speculation about “light charters” and other accommodations to innovative developments.

Philosophy of regulation versus innovation

On one hand, it’s clear OCC recognizes that banks can’t be on the sidelines during the period of innovation. “We want the federal banking system to remain vibrant and capable,” said Beth Knickerbocker, counsel, legislative and regulatory activities at OCC.

On other hand, OCC recognizes that, at present, federal regulators are not an accelerating factor on innovative development.

“We know that we’re not transparent and not very timely,” said Kay Kowitt, deputy comptroller for the western district for midsize community bank supervision. “We’ve heard some of that today” during the earlier panel discussions.

Panelists noted that the research going into the white paper explored the viewpoints of many stakeholders in financial services. However, to these external viewpoints, the agency added a cross section of OCC staff opinion, up and down the hierarchy.

One result was a deeper appreciation of the views of OCC’s frontline troops, according to Maryann Kennedy, deputy comptroller for large bank supervision: “Our own examiners feel we [as an agency] are risk averse.”

Kennedy added that while responsible innovation’s benefits have become important to OCC, it remains rooted in fundamentals: “We cannot—and will not—relinquish our responsibilities as prudential regulators.”

The white paper itself was quite short for a regulatory document—it was a booklet, not the usual tome. And this may be an indication of what bankers, fintech players, and others can expect, at least initially.

“The mandate going in,” said Kowitt, “is not to push out a lot of new guidance.” Speakers pointed out that there’s a great deal of regulation, policy, and analysis published by regulators already. In some cases there may need to be adjustments given the evolution of services through the influence of innovation from inside and outside banking.

And in some cases, what's already been said needs to be applied to new relationships. For example, John Vivian, director for risk governance, in OCC’s supervision risk management section, noted that 2013 guidance put out on working with third-party providers applies to such arrangements. Many commentators and advisors favor banks and fintech players partnering up, cooperating instead of competing.

Kennedy pointed out that innovation in financial services is not new, only the forms of some of what’s going on now. And she acknowledged that risk-taking is part of what banks do—it’s not a foreign element to their role.

“I would suggest that we are trying to look at things in a fresh, new way,” said Kennedy. However, banks’ risk management practices as they explore innovation will be scrutinized carefully. Risk management no longer ranks as a leading-edge practice, but instead is seen by the regulators as good governance.

Kennedy added that “what we don’t want is for our banks to be chasing the next new idea,” not without determining if that idea fits into a bank’s overall strategic plan.

Regarding developmental “sandboxes” or similar approaches, it became clear that no decision has been reached on that concept yet in this country. Knickerbocker suggested that discussions will be an ongoing part of the regulator-banker relationships.

“It’s hard for a regulator to get their arms around the idea of a ‘free pass’,” said Knickerbocker. “We can have a dialog with folks early on about what our regulatory expectations will be.”

While banks want a sense of how much leeway they will have, they aren’t alone. “Fintechs also want to know what the rules of the road are, from OCC,” said Knickerbocker.

As for large banks, ongoing discussion is a way of regulatory life, said Kennedy, “though I don’t want to suggest any ‘kumbaya’.”

Finding some direction

The working definition of “responsible innovation” unveiled in OCC’s paper and underlying the final panel appears to be an ongoing yardstick. It holds that responsible innovation is: “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 business strategy.”

A strong interest by Comptroller Thomas Curry in the potential of fintech innovation generally to facilitate financial inclusion was reflected by the panelists.

At the session the following objectives for the OCC’s innovation framework development team were unveiled for the first time:

• Develop organizational structure options.

• Establish a transparent and timely process for decisions and issuing communications.

• Create a formal outreach program to provide continuous learning regarding evolving financial services and customer needs, and that enables OCC to serve as a resource to stakeholders.

• Implement an internal process for education and awareness.

• Establish communication channels and information sharing mechanisms with other regulatory agencies.

Other coverage of sessions at the OCC forum:

Fintech, “regtech,” and coping with tech: OCC forum examines the big picture of disruption

Where is innovation heading?: OCC forum speakers praise innovation’s promise, but much is yet to come

Better serving beleaguered consumers: OCC forum session explores helping consumers via fintech

10 takeaways from the conference: Banker-attendee Chris Nichols of CenterState Bank distills the day's proceedings into a think and do list.

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