How do you think that regulatory rules within the finance sector are changing to accommodate new startups?
The existing regulatory regime contemplates the delivery of financial services by institutions that in some ways bear little resemblance to many of the new and emerging financial services companies that are prominent in today’s market. These innovations present new and interesting challenges, particularly for regulators who are charged with administering the existing regulations. Regulations are often slow to change thanks to cumbersome administrative rules and processes, despite a financial services paradigm that was marked by much more progressive change.
While we expect that these rules will continue to change and develop to meet the market where it is and have already seen this to some extent with the passage of certain new laws and adoption of new regulations, in the meantime, the capacity to influence the implementation and administration of existing laws and regulations is of vital importance.
In Dec 2016; the OCC published preliminary thoughts on expanding national bank charters to financial tech companies and growing position of non bank providers; what are your personal thoughts on this?
The Office of the Comptroller of the Currency (“OCC”) has announced that it may charter a new type of special purpose national bank to facilitate the provision of core banking activities—receiving deposits, paying checks or lending money—through financial technology (or FinTech). The OCC’s willingness to consider applications for a Fintech Bank Charter is an acknowledgment that the financial services industry is evolving and technology plays an increasingly vital role in both the development of and access to financial services.
Because Fintech special purpose national banks will be subject to the same rigorous standards (safety and soundness, fair access and fair treatment) that apply to all banks under the OCC’s jurisdiction, this new charter type should not be mistaken for an easing of the requirements applicable to those providing core banking services (receiving deposits, paying checks or lending money), FinTech or otherwise .
The US is gearing up for a new presidential election in 2020; what are the implications that could happen depending on the candidate who wins?
While there remain some philosophical differences about the role of government in the regulation of financial services between the parties, the fundamentals of the regulation of the industry are rooted in a long history both at the state and federal level. Changes in presidential administrations, for example, often change the administrative priorities of federal agencies like the Consumer Financial Protection Bureau, and may affect the tone and tenor of both enforcement and policy making, but the laws and regulations that form the existing regulatory landscape are much slower and much more difficult to change. As a result, I always recommend that my clients take a longer view and develop strategies that are not dependent on what individual is sitting in the White House or what party is in control of a particular institution.
There is an idea of free and fair trade markets verse more regulated markets; what is your personal opinion on regulation and the implications of new challenger banks coming to the US?
Financial services is one of the most heavily regulated industries in the U.S. as well as worldwide. Governments are remarkably invested in ensuring that the banking system and the financial services ecosystem more broadly function in ways that promote economic growth. While there are certainly pockets of activity that may be more heavily regulated in certain markets, in general, it is difficult to bring a financial services product to market, whether a payments product, lending product or a securities product, that is without some sort of regulatory component.
My most successful clients are those that embrace the regulatory environment that they find themselves in and work to develop a strategy that marries their vision with their competencies, and seek out partnerships where there might be an asymmetry. This calculus is the same for startups, legacy institutions that find themselves offering a product or service that implicates a new regulatory regime, and for institutions that are new to the U.S. market. The companies that will ultimately “win” are those that develop the acumen to understand the regulatory framework and invest resources to navigate it thoughtfully.
What type of advice would you provide a new payment company starting to build out in the US?
The most important advice that I can give a new payments company is to make the regulatory complexity a competitive advantage. If you can develop a strategy that manages your regulatory risk, you will find far more doors are open than closed to you. We often think about this in the context of regulators, but the reality is that prospective partners and investors will want to understand how you have navigated this regulatory labyrinth and will want to be comfortable that the positions that you have taken along the way are defensible. There are so many good ideas in the market and an abundance of strong technology behind them, but without solving the regulatory piece, the value of these products will never be truly realized. As I often say, your regulatory exposure is in direct proportion to your success – if you are as successful as I expect you have every interest in being, then you have to realize that the regulatory issues are not going to solve themselves. Sooner or later a regulator or an aggrieved consumer is going to ask the question and it is much better to have thought about the answer in advance.
The first question I always ask my startup clients is what problem they are trying to solve by bringing their product or service to market. This answer will shape and inform the strategy going forward. After all, you have to know what you are offering to understand how regulators will perceive it. This exercise of “thinking like a regulator” will help you make tactical decisions very early that will lead to a cogent regulatory strategy. That takes us to the second question, which is: knowing what is required from a regulatory perspective to bring your vision to market, would you rather (i) develop this capability internally, (ii) partner with another entity that has these capabilities, or (iii) partner while you develop this capability. Weighing and balancing these options is, from my perspective, the thing that will set your venture apart from others.
In 2018, the Financial Times presented you the Standout Ranking in ‘Access to New Markets and Capital’ category. What did this award mean to you?
As much as I am grateful for the Financial Times award, I consider the underlying matter to be the real accomplishment. Our client, Coinbase, became aware of a limitation in the North Carolina Money Transmitter Act that would have required the company overcapitalize its operations there in order to continue to offer services to North Carolina customers. After discussing the issue with the state agency, we came to understand that the solution was not going to be one of administrative interpretation, but would require a rewrite of the underlying law. There were a lot of factors working against us, including a very short legislative session, legislative rules governing the introduction of new legislation, and a very technical issue, however, thanks to the heroics of Whitney Campbell Christensen and the team at Ward and Smith, the local counsel that we brought in to drive this local lobbying effort, we were able to get the necessary legislative fix passed, which enabled both Coinbase and other crypto exchanges to remain operational in North Carolina. The fact that the Financial Times saw fit to recognize this work was just the icing on the cake.
Reach out to Sara on LinkedIn.