On June 8 last year US President Donald Trump managed to get through the House of Representatives his so-called Financial Choice Act.
Within just four days of that passage the first of a series of ‘core principles’ reports, detailing areas for reform that would not require legislation, was issued by the US Treasury Department. (The EU legislative model of first having a directive and then following with what are usually the more meaty regulations is followed there too).
Those core principles were the basic underlying measures which, rooted in the President’s main objective of rolling back financial services regulation, did not however really do much to quell much disagreement between individual US states and Washington.
The US too is now deeply immersed in the fintech, regtech, blockchain, cryptocurrencies, and what not, revolution. But as Washington seeks to persist with its intention of massive regulatory rollback, several states continue to disagree sharply with central government over how to regulate and supervise the new financial technology sector.
There are some 1,400 national banks and federally chartered savings institutes which are supervised by one of the plethora of US regulators, the Office of the Comptroller of the Currency (OCC), and court cases are already under way where purely state-based regulators are in fact challenging the OCC on different issues, and these not only on a jurisdictional exercise of power conflict theme basis.
The problem of the US having too many FS regulators across the vast span of the land is one which has long attracted the interest of academics. It is a problem which even the US Treasury itself recognises, vide e.g. its own reference to it in one of its post-Choice Act reports.
The CFTC, the SEC, the OCC, the central Fed, the state Feds, the FDIC, the CFPB, the House (Senate) Financial Services Committee, and the various state Departments of Financial Services, these are all bodies that continuously come over to both FS practitioners and consumers as inward-looking and keener to cover their own patches, with at the same time real congressional action to consolidate them often more conspicuous by its absence or ineffectiveness.
To be fair, the US Treasury Department has gone on record as wanting to see these bodies as “working together to increase coordination of supervision and examination activities”, as well as “consider coordinating enforcement actions”.
Each of the US 50 states is empowered to charter new banks and enforce consumer and investor protection. And of course the fragmentation extends also to the insurance industry.
Several states continue to disagree sharply with central government over how to regulate and supervise the new financial technology sector
There is also the Conference of State Bank Supervisors (CSBS) and this body does its best not to appear as Washington-centric. Federalism – the division of state and federal powers – has recently come very much to the fore when the OCC published its own special-purpose charter on fintech.
In April last year the CSBS filed in the US District Court for Columbia a 31-page complaint against the OCC arguing that its permitted oversight is limited to the business of banking, and that its fintech charter violated the US Constitution’s 10th Amendment, which assigns to the states any powers not delegated to the federal government.
The complaint made the point that congress has not specified a non-bank charter for fintech, nor expressed intent to preempt state law.
When it came to new moves on the fintech front former OCC comptroller Thomas Curry had described as a responsible innovation the initiative where entrepreneurs partner with banks (or potentially become banks themselves), and to be able to do this without running against old laws that are difficult to apply in new circumstances.
Curry’s wish was for the US to remain competitive in the world fintech environment. It is an environment where China already has operating giants (e.g. KPMG’s 2016 Fintech 100 report), where US firms are coming along very fast, with the same becoming the case for Australian, UK, and Singaporean firms.
When Curry left office and was initially replaced as OCC chairman, first by Keith Noreika, and then by Joseph Otting, initial public perceptions of what would become possible and innovative became more robust, even if also clearly being seen as at odds between the OCC and the CSBS.
The US banking sector is dynamic, 75 per cent of it is supervised by the CSBS, and so are non-bank mortgage, money transmission, and consumer finance companies: in total all a robust platform for innovation.
This therefore is a scenario which is standing on the edge of an as yet unseen future, as much as, say, is the case with British banking in the run-up to Brexit. US banking is in anything but a static state.
The multiplicity of regulators and the strong sense of state self-assertion is a situation where it is likely that resorting to the courts will increase and not increase. Of course decisions will not always please everyone. Neither will they fix the problems of fragmentation. Optimists will however also hope and add that the progress of technology will also not be impeded.
If comparisons are “odorous” (that’s what Shakespeare really wrote, not “odious”) how sensible has been Malta’s approach, where our single regulator has already hammered together the way that the new financial revolution will be expected to function in our albeit small environment.
So let’s continue to be interested in watching the foreigners, but also thank the Lord for our smallness and the way we take advantage of it.
John Consiglio teaches banking regulation at the University of Malta.