U.S. Government Accountability Office Issues Recommendations on FinTech Regulation

By  Judith Rinearson and Eric A. Love

The U.S. GAO issued its anticipated 132-page report entitled “Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight.”  In the report, the GAO describes the benefits and risks; regulatory oversight and challenges; and regulatory efforts to foster innovation with respect to the following four specified FinTech activities: person to person payments, marketplace lending, digital wealth management and distributed ledger technology.  It also offers recommendations about how to enhance FinTech regulation.

Notably, the GAO indicates that “[f]intech products pose similar risks as traditional products, but their risks may not always be sufficiently addressed by existing laws and regulations.”  It states that efforts by regulators to “monitor developments and risks posed by [FinTech companies] and their financial innovations remains a sound approach.”  The GAO also acknowledges a concern raised by many FinTech industry participants — the significant costs and time required to comply with the fragmented patch-work of state laws that apply to FinTech companies, including money transmitters, consumer lenders and small robo-advisers.  Some industry participants maintain that these challenges impede industry innovation, although they also concede the need for some regulation as with traditional products and services.

Among other things, the GAO makes specific recommendations to the federal financial regulatory agencies, as well as the FTC, FCC, FINRA and the Conference of State Bank Supervisors (“CSBS”) on ways to improve FinTech regulation, including through interagency cooperation and consideration of non-U.S. regulatory approaches like regulatory sandboxes that enable FinTech companies to test new products and services in “limited-risk environments.”  In written comments in an appendix to the report, the regulatory agencies concurred with their respective GAO recommendations and detailed the steps that have or will be taken to achieve them.  Of particular interest was the CSBS 14-page response that noted the ways in which states are streamlining their licensing processes, and that described the OCC’s FinTech special purpose charter as “an unprecedented level of preemption of state usury laws.”  This well-documented report provides helpful insights into the regulatory perspectives of U.S. state and federal regulators regarding new FinTech technologies.