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March 22, 2018

The U.S. GAO published a report that assesses the regulatory oversight in the fintech landscape in the United States and offers recommendations for improvement. In written comments on a draft of this report, the agencies stated that they concurred with the GAO recommendations and would take responsive steps. GAO made recommendations for improving inter-agency coordination on fintech, addressing competing concerns on financial account aggregation, and evaluating whether it would be feasible and beneficial to adopt regulatory approaches similar to those undertaken by regulators in jurisdictions outside of the United States.

The GAO report assessed fintech benefits, risks, and protections for users; regulatory oversight of fintech firms; regulatory challenges for fintech firms; and the steps taken by domestic regulators and regulators in other countries to encourage financial innovation.  The report concludes that fintech products pose similar risks as traditional products, but their risks may not always be sufficiently addressed by existing laws and regulations. It was also noted that fintech activities create data security and privacy concerns and could potentially impact the overall financial stability as fintech grows. The extent to which fintech firms are subject to federal oversight of their compliance with applicable laws varies. The U.S. regulatory structure poses challenges to fintech firms. With numerous regulators, fintech firms noted that identifying the applicable laws and how their activities will be regulated can be difficult. Although regulators have issued some guidance, fintech payment and lending firms say complying with fragmented state requirements is costly and time-consuming. Given their mandated consumer protection missions, regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services.

In the report, GAO identified leading practices for inter-agency collaboration, including defining agency roles and responsibilities and defining outcomes. Implementing these practices could increase the effectiveness of regulatory efforts to help resolve this conflict. Regulators abroad have taken various approaches to encourage fintech innovation; these include establishing innovation offices to help fintech firms understand applicable regulations and foster regulatory interactions. Some use regulatory sandboxes that allow fintech firms to offer products on a limited scale and provide valuable knowledge about products and risks to both firms and regulators. Regulators abroad have also established various mechanisms to coordinate with other agencies on financial innovation. While some U.S. regulators have taken similar steps, others have not, due to the concerns related to favoring certain competitors or perceived lack of authority. While these constraints may limit regulator ability to take such steps, considering these approaches could result in better interactions between U.S. regulators and fintech firms and help regulators increase their understanding of fintech products. This would be consistent with the GAO framework calling for regulatory systems to be flexible and forward-looking to help regulators adapt to market innovations.

 

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Keywords: Americas, US, Banking, Securities, Fintech, Regulatory Oversight, GAO

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