By Joel Sherwin, Neopay
With all the pledges Donald J. Trump made to reduce regulation for financial services firms in his election campaign, there’s been a lot of debate as to what reforms, if any, he will make during his term as president. However, few people seem to be discussing what reforms he should make—not just to benefit financial services businesses, but consumers and the country as a whole.
What reforms would fit with his “Make America Great Again” slogan, or as I prefer to think of it, what reforms would make America greater than it already is? What changes would have the biggest positive impact for our sector, consumers, innovation and our economy?
Money Services Business Licensing
The first one that comes to mind is our system for Money Services Business licensing. It’s far more complex and expensive in the U.S. than most other countries. I believe there are realistic potential improvements, not just to help firms, but also supervisors and consumers.
There is a battle going on between the state regulators and the Office of the Comptroller of the Currency (OCC) for control over our fintech sector. The OCC recently published a proposal for a special purpose nonbank charter, which could move large portions of the fintech sector under its remit and potentially allow some fintech firms to avoid the state licensing system. State regulators, some of which already are taking steps to make cross-state licensing more efficient, are fighting back and suing the OCC.
Although the move from the OCC could be seen as a way to simplify licensing for some firms, it also poses drawbacks for the industry and consumers and is never likely to be supported by state regulators. Trump is unlikely to involve himself in this move by the OCC; however, he could use it to his advantage as leverage to encourage state regulators to speed up their efforts to coordinate and simplify U.S. licensing.
So what could a licensing system look like if we aren’t to move to a single regulator for fintech? If we look at the European Economic Area model, which not only covers the largest single market in the world, but also 31 individual countries, it has managed to significantly reduce the cost and complexity of gaining licenses, increasing innovation and fuelling huge growth in certain areas of financial services including fintech.
It has the advantage of encouraging competition between regulators, too. Firms can choose where to be licensed based on the attitude, efficiency and reputation of the regulator. This has led to developments not just to reduce licensing timescales, but also to help firms develop new products, such as innovation hubs and sandboxes. New products born from these initiatives can quickly spread across the region. Surely a comparable system for state licensing in the U.S. would have a similar impact.
Europe uses a “passporting” scheme where firms gain one license in one country and then passport this license into other countries within the EEA—enabling them to operate across the continent under one license. This massively reduces the cost and complexity of compliance. The key to making it work is to focus on minimum requirements, upon which all parties can agree, and then providing each party with the flexibility to add additional requirements as desired.
|By reforming our licensing system, we would not only reduce the compliance burden for firms, but we’d also promote growth in the sector, increase competition and choice for consumers, encourage innovation and reduce the costs for taxpayers. Surely that comes under the definition of making America greater.|
The European system recognizes the fact that most of the requirements and frameworks of financial regulation are similar across different regions, but that there are differences in the detail to allow for different risks and requirements in different jurisdictions. It permits each country to define these details themselves and then apply them to any firm that operates in that country, regardless of where it is licensed.
Although U.S. state laws and requirements do not all stem from the same legislation as they do in Europe, they do all follow similar frameworks and high-level requirements. Setting up a similar system in the U.S. would not require the removal of control from each state, but simply a recognition of the similarities and differences that exist in current state legislation.
In Europe, firms have one main supervisor—the regulator in the country in which they are licensed—but through the passporting system, regulators in other countries still have oversight—either directly or through the main regulator. In the U.S., states would still be able to define their own legislation and maintain oversight over firms but at a greatly reduced cost.
By reforming our licensing system, we would not only reduce the compliance burden for firms, but we’d also promote growth in the sector, increase competition and choice for consumers, encourage innovation and reduce the costs for taxpayers. Surely that comes under the definition of making America greater.
Rise of Regtech
Improving technology solutions available to firms for their regulatory compliance also has a significant impact on reducing costs and resource requirements in financial services. They also can help speed up on-boarding rates and help firms to undertake a higher level of monitoring of existing clients, helping to reduce fraud and detect suspicious activities.
If the current administration wishes to help firms in our sector, then promoting growth and innovation in regtech needs to be a priority. Other countries are starting to be far more proactive, taking steps to encourage investment and ensuring regulators are engaging with this market to assist developments, not just in regulatory reporting but also providing insight into regulatory trends and concerns. These countries are actively promoting regtech and its potential throughout the financial and investment markets. They’re also promoting themselves as a good place for regtech startups to do business. Some governments and regulators are even holding distinctive events like hackathons to boost interest and advancements.
By looking at initiatives elsewhere, the Trump administration could help boost this sector in the U.S., helping the financial services sector as a whole, as well as putting the U.S. at the forefront of the global regtech market. Encouraging investment, regulator cooperation and promotion of the U.S. as a base for regtech startups all could significantly boost this market.
There are many new solutions coming into the market at the moment, all of which will help growth and innovation in financial services through reducing the resource requirements for compliance and automating previously time-consuming manual processes.
Hopefully we will see this area fully supported and a growth of the regtech sector in the U.S. at least equivalent to that of similar markets elsewhere to prevent our financial services industry potentially falling behind other regions.
Payments for High-Risk Products
Sorting out payments for products seen as high-risk is an area where the U.S. could really get ahead of the curve internationally.
Everyone knows the pattern—at the moment legal, cannabis sales are the main focus of media attention. Products are legalized under more and more state laws and become more socially acceptable, but merchants struggle to find payment processors that are able to take on their business. From the payment processors’ perspective, many are interested to accept the business and even develop proper frameworks for taking on these new clients. But issues with banks and potential issues with the federal government prevent them from offering services to merchants in high-risk categories.
This leads to a severe lack of competition in payment solutions for merchants and, in extreme cases, vendors and merchants relying on cash, which they then can’t bank.
The legalization of these products is, in part, to reduce the use of cash and the inherent dangers that sit alongside it: the risk of violent crime, increased money laundering, the lack of an audit trail to enable criminals to be identified. Why, then, do we repeatedly find ourselves in situations where legal products can’t be bought and sold through payment processors, leaving merchants to rely on cash?
Any government that tackles this issue, and develops an ongoing solution that will assist payments for future “high-risk” products will boost its economy and reduce crime.
Muddy Waters of UDAAP
The biggest issue with Unfair Deceptive Abusive Acts or Practices (UDAAP) is the uncertainty businesses feel over what could potentially be seen as a breach and when they could face action, in particular, in respect to what could be claimed as abusive of a consumer.
Individual states already have legislation to prevent abuse of consumers, and these laws have not led to the uncertainty that has arisen through UDAAP.
Other countries also have consumer protection laws to prevent abuse, some of them principle-based, and yet these countries have managed to avoid the confusion and uncertainty that currently exists in the U.S.
If we look at the U.K. as an example, their “Treating Customers Fairly” principle has been in operation for more than 10 years now. The regulator also produced detailed guidance and undertook thematic reviews to help educate themselves and the regulated market on the types of activity that would be seen as a breach of this principle.
Using data from other countries, for example, on what activities have been seen to be an “abuse” of customers, along with activities that have caused significant consumer detriment and negative media attention, is one way for firms to address this uncertainty. But it would be extremely helpful if government agencies could take the initiative in this regard and provide more information and examples of good and bad practice for firms.
Undertaking reviews on behalf of the market and providing more detailed information greatly reduce the need for firms themselves to research this aspect of financial services provision. It also ensures greater protection and confidence for consumers, as the market would be able to take a more standardized approach to this area of regulation. This should be encouraged by the Trump administration.
But the main action that the Trump administration could take to help tackle the confusion that has arisen would be to look at reforming the CFPB and restricting the enforcement of federal UDAAP actions, especially as relating to “abusive” acts or practices.
States have their own legislative regimes with respect to consumer protection and these are able to take into account the specific needs and risks of that state. States can also ensure that the balance between consumer protection and market growth is in line with their own aspirations.
The uncertainty caused by developments in UDAAP and its enforcement is having a detrimental impact across the financial services industry, slowing development and growth. If the Trump administration were to tackle this uncertainty, either through reforming the CFPB or adding definitive guidance to better define what is a violation, this would be a significant step in the right direction.
Making America Great Again
The ideal changes to our current regulatory regime would help boost growth in our sector and the economy in general. These changes need to help increase competition and innovation through promoting fintech and regtech, as well as more established financial services, help new firms in other markets access the right financial products for their needs (including high-risk groups) and help increase consumer confidence.
If Trump really wishes to reduce the regulatory burden for financial services firms, while maintaining his “Make America Great Again” mantra, he needs to focus on areas that will have the biggest practical impact for firms while not undermining confidence in our financial system—changes that won’t be detrimental to consumers or help aid criminals and terrorists. Those are the changes that would have the biggest positive impact for our sector, consumers, innovation and our economy.
Joel Sherwin is president of U.S. operations for compliance consultancy Neopay. Sherwin is a payments lawyer and fintech executive, who previously served as general counsel and chief operating officer of a U.S.-based network branded prepaid card program manager. He can be reached at firstname.lastname@example.org.
In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.