Treasury Official Calls for a New Regulatory Approach for Fintech

"We need a new approach by regulators that permits experimentation for services and processes," said Phillips, adding that it could include regulatory sandboxes, aka innovation facilitators. That regulatory structure typically involves some relaxation of regulatory requirements to allow startups or established firms to deploy new technology-based financial services for a limited time, without undergoing an extensive authorization process.

The current financial regulatory system is fragmented, consisting of multiple federal regulators along with state regulators, but "federal regulators are the most important," said Phillips. He said state regulation should harmonize with federal regulation and federal regulators should harmonize among themselves. He also suggested that a federal charter could perhaps pre-empt a state charter.

"Cooperation among regulators" is a goal, he said, noting that aligning regulations could increase online lending flows.

"One of the challenges across regulators, is [that] all the information they collect becomes confidential supervisory info, which gets siloed and can't be shared with the public or in some cases other regulators," said Phillips. Another challenge, he said: the massive digitization of data, which raises issues about how to manage data and protect consumers at the same time.

He said the Treasury report, which surveyed many different companies, from fintech to nonbank companies to traditional firms, will also explore letting companies work across states and on a national basis as well as discussing vendor management rules and how they can be approved on timely basis.

The report, like the three before it, carries out an executive order issued in February 2017 to review the federal regulation of the U.S. financial system in accordance with several core principles, including preventing future taxpayer-funded bailouts, fostering competition of American companies with foreign firms and empowering Americans to make independent and informed financial decisions.

In June 2017, the Treasury issued a report recommending relaxation of many financial regulations and streamlining supervision of the financial sector. Included in that report was the recommendation that the Financial Stability Oversight Council, created by Dodd-Frank and chaired by the Treasury secretary, have the power to coordinate how regulations are enforced. In addition to the Treasury, the FSOC consists of Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Reserve, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Federal Housing Finance Agency and National Credit Union Administration.

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