U.S. fintech industry jealously eyes U.K. regulatory scheme

Register now

LAS VEGAS — Call it a case of regulatory envy.

The balkanized, often slow-moving system of supervising the burgeoning U.S. fintech industry came into unflattering juxtaposition Sunday with a widely praised experiment by the U.K. government.

Current and former officials from the two countries spoke at the Money 20/20 conference, just two days after the British government released a report that hailed its so-called regulatory sandbox initiative as a success.

The U.K. report found that the Financial Conduct Authority’s year-old experiment has reduced the time and cost of getting new ideas into the market and helped facilitate access to capital for innovators.

Companies that get approved to enter the regulatory sandbox work with British regulators to design and implement a six-month test. Following the testing period, around 90% of participating firms have continued toward a wider launch of their products, the report stated.

The U.K. government is offering flexibility to innovative companies because of the potential that new technologies have to help consumers. “How far do you want consumers to benefit from the wave of innovation?” asked Christopher Woolard, director of strategy and competition at the Financial Conduct Authority.

U.K. companies participating in the regulatory sandbox have included startups and large firms. Under the program’s rules, firms may be allowed to operate in certain legal gray areas, and the government’s involvement may allay executives’ worries about their risk exposure — but they still must abide by consumer protection rules.

“There is no point in having sandboxes where there’s a sort of race to the bottom,” Woolard said. “Because ultimately we’re trying to get folks in a position where they really can thrive in what is a regulated market.”

The situation is far different on this side of the Atlantic, where a mishmash of state and federal regulators have overlapping responsibilities, a situation that has made it harder for innovators to receive certainty about what is allowable.

One theme that emerged Sunday at Money 20/20 is that the push and pull between federal and state agencies is serving as a barrier to the kind of regulatory experimentation that the U.K. is pioneering.

A recent example of that tension was the decision by state regulators to sue the Office of the Comptroller of the Currency over the federal agency’s authority to offer a specialized banking charter for fintech firms.

Benjamin Lawsky, a former supervisor of financial services in New York, said that he understands why state regulators are wary of the OCC. “If you get an administration that is really committed to the deregulation of the world, I don’t know if that is necessarily a healthy thing,” he said.

But Thomas Curry, the former comptroller who pushed for the creation of the fintech charter, lamented the states’ lawsuit. “I think it’s unfortunate if out of that litigation we come to a judicial determination that banking is static,” said Curry, who left office earlier this year.

While U.S. financial regulators are not mimicking the U.K.’s approach, some agencies have sought to make life easier for startups in recent years.

For instance, the Consumer Financial Protection Bureau recently informed one California-based online lender using alternative data in credit decisions that it does not intend to start a fair lending enforcement action against the company provided it reports regularly on the impact of its methodologies. The OCC recently opened an innovation office, where firms are encouraged to discuss their products with regulators.

But startups that initiate conversations with U.S. regulators often leave those meetings with no greater certainty about their potential legal exposure than they had before.

“My experience so far has been that regulators are happy to hear companies out. But they do less talking,” said Manny Alvarez, general counsel at Affirm, an online lender based in San Francisco. “That is at times unfortunate, because I think one can foster better engagement if you create some kind of feedback loop.”

Jeff Foster, CEO of Clara Lending, a digital mortgage company based in San Francisco, said that U.S. regulators should try to empathize with entrepreneurs who are looking to innovate. He also called for greater coordination among various agencies.

“I think an atmosphere of cooperation is really, really important,” he said.

For reprint and licensing requests for this article, click here.
Fintech regulations Fintech Marketplace lending Litigation Financial Conduct Authority OCC CFPB NYDFS U.K. Europe