1. Fintech
Chapter 15:
Fintech and Government Regulation

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

3. 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)

4. Fintech Regulation
If it quacks like a duck,

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

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

7. 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

8. 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

9. 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•1999 Gramm-Leach-Bliley -repealed Glass Steagall, removing barriers between securities and banking businesses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.

10. 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.

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

12. Examples of Federal Laws and Regulations Relevant to Marketplace Lending

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

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

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

16. 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

17. Source: CB Insights