Federal regulators have taken a
Through the first quarter of the year, actions against fintech partner banks have accounted for 35% of publicized
The jump in enforcement actions against firms engaging in so-called banking-as-a-service, or BaaS, business models corresponds with the
“It’s undeniable that there’s more enforcement activity happening related to BaaS,” said David Sewell, a partner with the law firm Freshfields Bruckhaus Deringer. “You are seeing the fruits of the enhanced supervisory posture towards that space.”
The question moving forward is whether this recent string of activity is a momentary adjustment as agencies ensure their expectations are taken into account, or a permanent shift in regulators’ attitude toward BaaS models.
Along with crafting new expectations for fintech partnerships, Washington regulators are also putting together specialized supervision teams to explore these activities more comprehensively. Last year, the OCC launched an Office of Financial Technology to “adapt to a rapidly changing banking landscape,” and the Fed established a similar group called the Novel Activities Supervision Program, which tracks fintech partnerships, engagement with crypto assets and other emerging strategies in banking.
These fintech-specific developments come at a time when the agencies are changing their approach to supervision across the board with an eye toward escalating issues identified in banks more quickly and more forcefully. The effort is being undertaken in response to last year’s failure of Silicon Valley Bank, which had numerous unaddressed citations — known as matters requiring attention — at the time of its collapse.
The FDIC has already amended its procedures and now directs its supervisors to elevate issues if they are unresolved for more than one examination cycle. A Government Accountability Office report
Gregory Lyons, a partner at the law firm Debevoise & Plimpton, said the confluence of these various developments will result in significant supervisory pressure on fintech partner banks, most of which are small community banks leaning on the arrangements to offset declines in other business opportunities.
“You have a general concern from regulators about fintechs, you have these new divisions within agencies focused solely on fintech activities and risks, and then more generally you have an exam environment in which things are going to get elevated quickly,” Lyons said. “This is a fairly volatile mix for banks relying heavily on fintech partnerships.”
Measuring supervisory activity and determining its root causes are both fraught exercises, said Jonah Crane, partner with Klaros. Public actions make up just a fraction of the overall enforcement landscape, which is itself a small portion of the correspondence between banks and their supervisors. Public enforcement actions are also intentionally vague in their description of violations, as a way of safeguarding confidential supervisory…
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