By Robert J. McCarthy
Global Legal Law Firm
On July 31, 2018, the U.S. Department of the Treasury released a report titled A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation. It was prepared in response to the Core Principles set forth in President Trump's Executive Order 13772, dated Feb. 3, 2017. The order lays out core principles with goals to empower Americans to build wealth, foster economic growth and create a more efficient regulatory scheme.
Most people support efficiency and economic growth. Determining how to accomplish those goals is the real dilemma. The 222-page report is full of recommendations that sound great, but lead to as many questions as answers.
The current regulation of fintech companies is complicated and includes many layers and multiple agencies. The report recognizes the regulatory framework is burdensome and does not foster an environment where innovation can thrive. The Treasury drafted dozens of recommendations designed to promote economic growth consistent with the Trump Administration's Core Principles.
Those recommendations fall into the following categories: adapting regulatory approaches to changes in the aggregation, sharing and use of consumer financial data; aligning the regulatory framework to combat unnecessary regulatory fragmentation; updating industry-specific regulations; and advocating regulation that enable responsible experimentation and advances American interests abroad.
The first chapter of the report addresses the dramatic increase in the collection and use of data in the financial services industry. Recognizing the regulatory system must adapt to realize the benefits of data evolution, the Treasury makes recommendations designed to promote economic growth and improve consumer access to data, while also limiting unauthorized third-party usage.
Some of those recommendations include: removing legal and regulatory uncertainties holding back financial services companies and data aggregators; coordinating with the private sector to develop solutions for data sharing and security; enacting federal data security and breach notification laws; promoting digital legal identity initiatives; and continuing to incorporate cloud technologies and artificial intelligence into financial services.
The chapter also recommends reform of outdated consumer communication rules, adopted during the era of mail order/telephone order transactions, to address digital communications, the reassigned numbers database and consumer preferences.
It additionally provides an overview of data aggregation and questions about benefits versus risks to consumers. It recommends new disclosure rules, including offering consumers a simpler way to limit, suspend or revoke prior data authorizations. The chapter also discusses how machine learning and artificial intelligence can provide significant benefits for the financial services industry and become a competitive advantage for U.S. firms.
The report's second chapter discusses the long-standing goal of harmonizing state and federal financial regulatory systems. It urges state regulators to ease challenges created by state-specific licensing requirements by adopting uniform laws and coordinating examinations whenever possible.
No industry suffers more from fragmented state licensing requirements than money transmitters (nonbank firms that transfer or receive funds on behalf of others). For instance, all money transmitters with nationwide footprints must be licensed by and subject to examinations in every state where they operate. Plus, definitions of money transmitters and their licensing requirements can vary significantly from state to state.
Any business in the money transmitter category must be pleased with the Treasury's threat of congressional action if the states cannot harmonize licensing requirements within the next three years. The real question involves the extent of proposed harmonization. For now, hope is on the horizon for money transmitters, lenders, loan servicers and others subject to individual state licensing.
One immediate impact of the report involves the Office of the Comptroller of the Currency's determination that fintech companies engaging in the business of banking, without accepting deposits, may now apply for special purpose national bank charters.
By opening the doors to fintech companies, the OCC recognizes that many technological innovations that have revolutionized the delivery of financial products and services have not come from traditional banks. Furthermore, the Treasury recommends that the Federal Reserve, Federal Deposit Insurance Corp. and OCC coordinate regulatory oversight to enable traditional banks to develop relationships with third-party service providers, many of whom are at the forefront of innovation.
The report's third chapter provides an overview of the lending industry and proposes recommendations ranging from codifying the "valid when made" doctrine recognizing banks as the "true lender," to rescinding the Consumer Financial Protections Bureau's payday rule, which restricts access to credit.
The Treasury recommends that policymakers address post-financial crisis regulations, which prevent traditional deposit-based lenders from adopting technologies that would allow them to compete with nonbank lenders, and ultimately create a more competitive marketplace that would benefit consumers.
The report also addresses student loans and servicing, which are topics that could easily justify separate reports on their own. Generally, the Treasury recommends that the Department of Education become more involved in setting standards with clear guidelines for the extensive network of nonbanks involved in loan servicing and debt collection.
Next, the report turns to the payments industry. The Treasury recognizes the importance of the current payments infrastructure to commerce, while at the same time understanding that new technologies are constantly changing the way people pay for goods and services. It describes the current payments system in the United States as "operationally complex" and built upon the "back-end" processes of heavily regulated financial institutions.
Not surprisingly, there has been little innovation on the "back end" while nonbank and technology firms operating on the "front end" of the payments industry continue to innovate and are responsible for launching new payments solutions, improving functionality and creating competition. According to the Treasury, although the current system is operationally complex, it allows private firms to innovate and build upon the payments infrastructure without being subject to extensive government supervision.
The report additionally describes the importance of money transmitters to the process of facilitating payments between nonbank firms via multiple channels. This echoes its earlier discussion about the fragmented state-specific licensing requirements, which affect money transmitters and hinder industry growth. The report also addresses new payment services including person-to-person payments and digital wallets. However, besides providing some adoption statistics by various age groups, the Treasury takes a "wait and see" position.
The Treasury identifies speed as critical to the modernization of the payments industry. This is not a new concept. The Faster Payments Task Force was put together in 2015 and produced a final report in 2017. As a result, The Clearing House's RTP system went live in November 2017 and is a new back-end payments system that allows clearance, settlement and availability in real time. The RTP system is open to U.S. depository institutions, but as of July 1018, it only connected six U.S. Banks. The Treasury agrees with the proposals of the task force and recommends the Federal Reserve move quickly to facilitate faster payments through the development of a real time settlement service and that allows access by smaller financial institutions, community banks, and credit unions.
Another key topic in the report addresses payments systems outside the United States. According to the report, an estimated 25 countries had live payment systems faster than those available in the United States as of mid-2017 ‒ before the TCH RTP went live. In the United States, the Federal Reserve operates the National Settlement Service, which is a deferred net settlement system and only operates Monday through Friday from 7:30 a.m. to 5:30 p.m. Some payments systems allow 24/7.
The report's last chapter focuses on enabling a policy environment. A prevailing theme of the report, discussed at length in this chapter, is the Treasury's recommendation that regulators proactively engage with the private sector to evolve with new technologies. According to the report, many private sector stakeholders expressed frustration by the number of state and federal agencies that must be consulted when bringing a new product or service to market.
Often, new technologies that could be implemented by financial services firms do not have an established regulatory scheme in place. In these situations, the Treasury recommends the creation of "regulatory sandboxes" in order to facilitate meaningful experimentation and promote innovation.
On the international front, the Treasury recommends the United States continue to engage in international forums and leverage international bodies to support domestic goals and regulatory priorities. The Treasury also concluded it would be premature to develop international regulatory standards for many applications of financial technology.
The Treasury's recommendations are designed to facilitate growth of the domestic financial services industry while benefiting U.S. consumers. Only a few recommendations appear to include anything resembling a specific action plan. Many are no more than general concepts. Time will tell how many will impact the current regulatory framework. 
Robert J. McCarthy is an attorney with Global Legal Law Firm, whose attorneys are well recognized as top payments industry experts. Contact him at rmccarthy@attorneygl.com.
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