Fintech Chapter 15: Fintech and Government Regulation

Fintech Regulation Financial Regulation Examples of Fintech companies committing violations Government programs to support Fintech

Fintech Regulation Basic policy question: How can a desire to foster innovation be balanced with protecting consumer and investor interests? “…Fintech offers the opportunity to provide financial services more efficiently, effectively, and inclusively…However, financial innovation can also produce products that harm consumers, misdirect savers and investors, inefficiently allocate capital, and harm borrowers and businesses.” (Brookings)

Fintech Regulation If it quacks like a duck,

It should be regulated like a duck. Fintech Regulation It should be regulated like a duck.

Consumer protection Investor protection AML Tax evasion Fintech Regulation Consumer protection Investor protection AML Tax evasion

Fintech Regulation Motivation: Information asymmetries between buyers and sellers of financial instruments Adverse selection Moral hazard Other concerns: Deposit insurance Reserve requirements Macro prudential issues Monetary policy Tax policy

Significant Legislative Acts I •1913 Federal Reserve Act – created the Federal Reserve System •1933 Glass-Steagall-segregated securities industry activity from commercial banks; FDIC was created •1933 Securities Act-required disclosure to investors •1935 Securities Exchange Act-established the SEC •1940 Investment Company and Investment Advisers Acts-provided for regulation of investment companies and advisers •1956 Bank Holding Company Act-brought holding companies under regulatory oversight •1980 Depository Institutions Deregulation and Monetary Control Act-phased out interest-rate ceilings on deposits, eliminated usury ceilings on loans, etc. •1982 Garn-St.Germain-gave thrifts wider discretion in lending

Significant Legislative Acts II •1989 Financial Institutions Reform, Recovery and Enforcement Act-created Resolution Trust Corporation to resolve insolvent thrifts •1991 FDIC Improvement Act-recapitalized FDIC, increased examination, capital and reporting requirements •1999 Gramm-Leach-Bliley -repealed Glass Steagall, removing barriers between securities and banking businesses •2002 Sarbanes Oxley-required independence of audit committee, personal certification of financial statements by CEO and CFO •2005 FDIC Reform-increased deposit insurance to $250,000 per account •2010 Dodd-Frank-created Financial Stability Oversight Council and Consumer Financial Protection Bureau. Created extensive rule making for derivatives markets.

Fintech Regulation State and Federal Agencies provide: Regulation Supervision Examination Principal Agencies: Federal Reserve System (for member banks) (FRS) Office of the Comptroller of the Currency (OCC) Federal Deposit Insurance Company (FDIC) Various State Regulators, including a banking regulator in every state.

Fintech Regulation Other regulators: SEC CFTC NFA Exchanges CFPB NAIC And state level regulators BIS FSB

Examples of Federal Laws and Regulations Relevant to Marketplace Lending

Fintech Regulation Startups in Violation of Regulations Lending Robot PayPal SoFi Dwolla Sand Hill Exchange Zenefits Lending Club Wrkriot

Fintech Regulation Policies to support Fintech startups OCC Special Purpose National Bank Charter JOBS Act Project Catalyst U.K. FCA sandbox

Project Innovate Sandbox Firms Billon BitX Bud Citizens Advice Epiphyte Govcoin Limited HSBC Issufy Nextday Property Limited Nivaura Otonomas Oval SETL Tramonex Swave

Fintech Regulation Fintech applications to assist in dealing with the burden of regulation: Regtech AML/KYC-these companies address Anti-Money Laundering and Know Your Customer regulations Blockchain-distributed ledger proof of concept projects are widely underway. Companies are active in critical issues of data security, audit etc. Risk Management-companies are active in various categories of risk management: enterprise risk, portfolio risk, and operations risk Analytics-Companies provide data analytics, valuation and modeling. Reporting-regulatory reporting requirements have mushroomed in the last decade. Companies in this space provide software and tools to support required and one-off reports. Tax-platforms, analytics and software to support tax analysis and reporting Trading-companies provide software and analytics to monitor employee and customer trading for risk, compliance and regulatory purposes

Source: CB Insights