Financial Services Developments Ahead for 2019 by Tim McTaggart
With a New Year comes new developments for financial services firms, consumers and policymakers. This year promises to be especially busy with a renewed focus on the operation of the CFPB with a confirmed agency head, with a new chair of the House Financial Services, first woman and African American, Maxine Waters, and with the impact of various incremental changes that will cross over into the banking/financial services world. Keep an eye on the following:
- Focus on the possibility of providing new banking products in connection with one facet of the cannabis marketplace especially with the change in law for hemp based products authorized by Congress last session in the 2018 enacted Farm bill so that such products will be treated as agricultural commodities and not as controlled substances. No further changes pertaining to cannabis in the bill but the industrial hemp cultivation can be regulated as a state activity and multiple states already permit it. Still lots to do here with banks possibly still need to track deposits for FinCen/AML purposes but a beginning pathway to possibly lend and offer other banking products to the evolving industrial hemp marketplace.
- Focus on diversity in the financial services executive work force. Chairwoman Waters has established a subcommittee to continue her oversight of this issue during the upcoming Congress, within the jurisdiction of the Financial Services Committee.
- Focus on doing regulation by rulemaking rather than enforcement actions. New chair of the CFPB, Kathy Kraninger, replaces acting director Mulvaney who believed that the agency needed to steer away from using its enforcement power to establish regulatory norms as new industry policy. However well intentioned by Mulvaney, it is inevitable that every agency through its enforcement power will be establishing precedent and giving an interpretation to facts and circumstances of specific terms within its purview. In other words, an agency can carry out a full rulemaking agenda to issue regulations but there always will be a need to have enforcement actions explain and identify fact patterns that fit the standards stated in a governing rule. Mulvaney may have been more accurate to say that the CFPB would not, during his watch, only make regulatory policy by using enforcement actions.
- Is this the year? Will the conservatorships of Fannie Mae and Freddie Mac move into a different status and towards a receivership stage or some other resolution? Acting FHFA Director Otting and nominee Cabraira will work hard this year to make progress on this long simmering policy failure festering since the Great Financial Crisis of ten years ago.
- Will the Industrial Loan company charter move ahead as a viable chartering option at the FDIC? There is great interest by fintech companies and others to consider the merits of pursuing a fintech charter but using the ILC form to house the activities. The ILC had not been a viable option until recently with the appointment of Chairman Jelena McWilliams who has expressed a willingness to have the FDIC consider new applications for ILC charters.
- Cybersecurity. Regional and larger banks need to continue their adaption of their banking platforms and inventory their vulnerability to cyber and related IT threats. Threat assessment outside of work platforms and work hours becomes more critical each year. It becomes increasingly important, and unfortunately even more annoying, for senior execs not to inadvertently introduce weak points of vulnerability for hacking by mixing personal and business use for technology platforms. For example, the internet of things makes linking home devices to other devices such as smart phones and car onboard computers extremely "cool" and convenient. However, if the bank's senior management team also is using that same phone or device, to access bank confidential data or for other routine business uses then unfortunately the defenses against hackers is lower because the safeguards of hacking, for example, into a CEO's refrigerator hooked up to his or her smart phone may be much easier to get into than the phone by itself, or by trying to access the data by overcoming the business firewalls through laptop use.
- AML process. There will be ongoing ideas from industry of methods to simplify the existing AML structure and suggestions for regulatory relief to recalibrate risk to the type of action taken which generates a SAR filing or other mandatory AML filing. The proliferation of AML requirements and OFAC requirements has made it more difficult for entities to build automated systems to facilitate compliance reviews and scrubs.
- Rewriting and redefining the community assessment area as part of the agency Community Reinvestment Act review. This is easier said than done. CRA review may be very worthwhile but it is not clear that a rewrite will lead to more predictable examination experiences and consistency but it likely will be able to address tech oriented banking platforms which do not neatly fit into current CRA requirements.
- Revisiting first principles related to fintech models in terms of interest rate exportation, bank licensing, fintech licensing, money transmitter issues, escheat law issues, and other consumer law issues for consumer product platforms both by industry, investors and regulators.
- Importance of Carpenter case to payments systems and other data tracking by banks for AI and online search purposes. Supreme Court case in Carpenter focused on privacy under the 4th Amendment for tracking a cell phone location on an ongoing basis and the use of a subpoena, rather than a warrant, by law enforcement to obtain such information. Needs to be reconciled with existing precedent on obtaining bank records. More on the Carpenter case in a future blog posting.
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McTaggart has been selected as an Advisory Board member for the First State FinTech lab in Delaware where he previously served as Bank Commissioner. McTaggart also previously worked as a regulator with the FRB in Washington, D.C. and as counsel to the U.S. Senate Banking Committee.