Financial Technology:

Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight

GAO-18-254: Published: Mar 22, 2018. Publicly Released: Mar 22, 2018.

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Lawrance L. Evans, Jr
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What GAO Found

Fintech products—including payments, lending, wealth management, and others—generally provide benefits to consumers, such as convenience and lower costs. For example, fintech robo-advisers offer low cost investment advice provided solely by algorithms instead of humans. Fintech products pose similar risks as traditional products, but their risks may not always be sufficiently addressed by existing laws and regulations. Also, regulators and others noted that fintech activities create data security and privacy concerns and could potentially impact overall financial stability as fintech grows. The extent to which fintech firms are subject to federal oversight of their compliance with applicable laws varies. Securities regulators can oversee fintech investment advisers in the same ways as traditional investment advisers. Federal regulators may review some activities of fintech lenders or payment firms as part of overseeing risks arising from these firms' partnerships with banks or credit unions. In other cases, state regulators primarily oversee fintech firms, but federal regulators could take enforcement actions. Regulators have published consumer complaints against fintech firms, but indications of widespread consumer harm appear limited. 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. Regulators are collaborating in various ways, including engaging in discussions on financial protections for customers that may experience harm when their accounts are aggregated by a fintech firm and unauthorized transactions occur. Market participants disagree over reimbursement for such consumers, and key regulators are reluctant to act prematurely. 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. GAO has identified leading practices for interagency collaboration, including defining agency roles and responsibilities and defining outcomes. Implementing these practices could increase the effectiveness of regulators' 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 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 concerns of favoring certain competitors or perceived lack of authority. While these constraints may limit regulators' 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 GAO's framework calling for regulatory systems to be flexible and forward looking to help regulators adapt to market innovations.

Why GAO Did This Study

Advances in technology and the widespread use of the Internet and mobile communication devices have helped fuel the rise of traditional financial services provided by non-traditional technology-enabled providers, often referred to as fintech.

GAO was asked to provide information on various aspects of fintech activities. This report addresses fintech payment, lending, wealth management, and other products. GAO assesses 1) fintech benefits, risks, and protections for users; 2) regulatory oversight of fintech firms; 3) regulatory challenges for fintech firms; and 4) the steps taken by domestic and other countries' regulators to encourage financial innovation within their countries. GAO reviewed available data, literature, and agency documents; analyzed relevant laws and regulations; and conducted interviews with over 120 federal and state regulators, market participants, and observers, and regulators in 4 countries with active fintech sectors and varying regulatory approaches.

What GAO Recommends

GAO is making numerous recommendations related to improving interagency 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. In written comments on a draft of this report, the agencies stated that they concurred with GAO's recommendations and would take responsive steps.

For more information, contact Lawrance L. Evans, Jr. at (202) 512-8678 or Evansl@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In a May 2018 letter, the Chair of the Federal Reserve Board noted that the Federal Reserve agreed that the National Credit Union Administration's (NCUA) oversight of credit unions provides it with experiences and perspectives that are relevant to the group's collaborative work on fintech consumer protection issues and accordingly, Board staff have invited relevant contacts at the NCUA to take part in future meetings of the Interagency Fintech Discussion Forum. In June 2018, Federal Reserve staff advised us that NCUA staff had been invited to participate in this forum and that some NCUA staff attended the forum's meeting held on June 28, 2018.

    Recommendation: The Chair of the Board of Governors of the Federal Reserve System should invite the National Credit Union Administration to participate in the Interagency Fintech Discussion Forum. (Recommendation 1)

    Agency Affected: Federal Reserve System: Board of Governors

  2. Status: Closed - Implemented

    Comments: In June 2018, FCC staff told us they had consulted with Federal Reserve staff about participating in the Mobile Payments Industry Working Group. They noted that they have designated a staff member to serve as point of contact for matters regarding this working group. Regarding the working group's next likely meeting in 2019, the FCC staff indicated that they agreed to discuss this meeting's agenda with the Federal Reserve and determine at that time whether it would be beneficial for FCC to attend that meeting.

    Recommendation: The Chairman of the Federal Communications Commission (FCC) should discuss with the Presidents of the Federal Reserve Banks of Atlanta and Boston whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 2)

    Agency Affected: Federal Communications Commission

  3. Status: Closed - Implemented

    Comments: In a May 2018 letter, the Chair of the Federal Reserve Board noted that staffs at the Federal Reserve Banks of Atlanta and Boston have been in contact with appropriate staff at the Federal Communications Commission (FCC) about the FCC's participation in the 2018-2019 Federal Reserve's Mobile Payments Industry Working Group (MPIW). The letter stated that Federal Reserve Bank staff were scheduling a call with FCC representatives to provide more details on the MPIW and discuss relevant topics and plans for the meeting. In June 2018, Federal Reserve staff provided documentation that Federal Reserve Bank staff had discussed the role of the working group with FCC staff and had agreed to talk again in advance of the next likely meeting in early 2019 about its agenda and possible topics in the mobile payments space that would be of interest to the FCC as well as other regulators.

    Recommendation: The President of the Federal Reserve Bank of Atlanta should discuss with the Chairman of the FCC and the President of the Federal Reserve Bank of Boston whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 3)

    Agency Affected: Federal Reserve System: Federal Reserve Bank, Atlanta, GA

  4. Status: Closed - Implemented

    Comments: In a May 2018 letter, the Chair of the Federal Reserve Board noted that staffs at the Federal Reserve Banks of Atlanta and Boston have been in contact with appropriate staff at the Federal Communications Commission (FCC) about the FCC's participation in the 2018-2019 Federal Reserve's Mobile Payments Industry Working Group (MPIW). The letter stated that Federal Reserve Bank staff were scheduling a call with FCC representatives to provide more details on the MPIW and discuss relevant topics and plans for the meeting. In June 2018, Federal Reserve staff provided documentation that Federal Reserve Bank staff had discussed the role of the working group with FCC staff and had agreed to talk again in advance of the next likely meeting in early 2019 about its agenda and possible topics in the mobile payments space that would be of interest to the FCC as well as other regulators.

    Recommendation: The President of the Federal Reserve Bank of Boston should discuss with the Chairman of the FCC and the President of the Federal Reserve Bank of Atlanta whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 4)

    Agency Affected: Federal Reserve System: Federal Reserve Bank, Boston, MA

  5. Status: Open

    Comments: In a May 2018 letter, the Acting Director of the Bureau stated that the Bureau has previously issued principles that include reasonable and practical means for consumers to dispute and resolve instances of unauthorized payments conducted in connection with or as a result of authorized or unauthorized data sharing access. The letter notes that the Bureau is committed to monitoring developments in data aggregation markets and will continue to assess how the Bureau's consumer protection principles may be best realized, including engaging in discussions with other relevant federal and state financial regulators. In October 2018, Bureau staff advised us that they made a presentation on existing consumer protections that would appear to be applicable to consumers using data aggregators at the June 28, 2018 meeting of the Fintech Interagency Discussion Group, which includes OCC, the Federal Reserve, the Federal Deposit Insurance Corporation, and the National Credit Union Administration. They noted they are monitoring private sector efforts related to resolving data aggregation issues and that additional discussions among the regulators about these issues will be held in the future. We will recontact the agency in the future to obtain information on additional actions it has taken.

    Recommendation: The Director of the Consumer Financial Protection Bureau should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 5)

    Agency Affected: Consumer Financial Protection Bureau

  6. Status: Open

    Comments: In a May 2018 letter, the Chair of the Federal Reserve Board noted that the Federal Reserve recognizes the importance of working together to determine how best to encourage socially beneficial innovation in the marketplace, while ensuring that consumers' interests are protected. The letter noted that the Federal Reserve staff have been meeting with other regulators and industry participants. The Chair states that the Federal Reserve will continue to facilitate and engage in collaborative discussions with other relevant financial regulators in these and other settings to help market participants address the important issues surrounding reimbursement for consumers who use financial account aggregators and experience unauthorized transactions. In October 2018, Federal Reserve staff advised us that issues related to data aggregation were discussed at a June 28, 2018 meeting of the Fintech Interagency Discussion Group, which includes OCC, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Bureau of Consumer Financial Protection. They noted they are monitoring private sector efforts related to resolving data aggregation issues and that they expect to hold additional discussions among the regulator about these issues in the future. We plan to follow up with Federal Reserve staff to obtain updates on these efforts in the future.

    Recommendation: The Chair of the Board of Governors of the Federal Reserve System should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 6)

    Agency Affected: Federal Reserve System: Board of Governors

  7. Status: Open

    Comments: In November 2018, FDIC staff confirmed that they have engaged in collaborative discussions with other relevant financial regulators regarding issues related to consumers' use of account aggregation services and associated liability issues. We will follow up with them in the future about their activities to address this recommendation

    Recommendation: The Chairman of the Federal Deposit Insurance Corporation should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 7)

    Agency Affected: Federal Deposit Insurance Corporation

  8. Status: Open

    Comments: In July 2018, NCUA staff indicated that staff from their agency had recently participated in a discussion forum with other federal regulators and other stakeholders on fintech, and, in particular, account aggregation challenges. They stated that they intend to continue to engage other regulators and related industry stakeholders on fintech topics and emerging technology that can have an impact on credit unions and their consumers. In October 2018, NCUA staff advised us that they have been discussing issues related to data aggregation at meetings of the Fintech Interagency Discussion Group, which includes OCC, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Bureau of Consumer Financial Protection. We plan to follow up with NCUA staff to obtain updates on these efforts in the future.

    Recommendation: The Chairman of the National Credit Union Administration should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 8)

    Agency Affected: National Credit Union Administration

  9. Status: Open

    Comments: In a May 2018 letter, OCC noted that its staff have met with the other banking regulators and with market participants about account aggregation issues in the past. In October 2018, OCC staff advised us that issues related to data aggregation were discussed at a June 28, 2018 meeting of the Fintech Interagency Discussion Group, which includes OCC, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Bureau of Consumer Financial Protection. We plan to follow up with OCC staff to obtain updates on these efforts in the future.

    Recommendation: The Comptroller of the Currency should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 9)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  10. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Federal Deposit Insurance Corporation should formally evaluate the feasibility and benefit of establishing an office of innovation or clear contact point, including at least a website with a dedicated email address. (Recommendation 10)

    Agency Affected: Federal Deposit Insurance Corporation

  11. Status: Open

    Comments: In July 2018, NCUA staff indicated that NCUA will evaluate the efficacy of an agency function dedicated to fintech. We plan to follow up with NCUA staff to obtain updates on these efforts in the future.

    Recommendation: The Chairman of the National Credit Union Administration should formally evaluate the feasibility and benefit of establishing an office of innovation or clear contact point, including at least a website with a dedicated email address. (Recommendation 11)

    Agency Affected: National Credit Union Administration

  12. Status: Open

    Comments: In a May 2018 letter, the Chair of the Federal Reserve Board noted that the Federal Reserve recognizes the importance of formally increasing its knowledge base related to financial innovation. The letter noted that the Federal Reserve has recently organized two nation-wide teams of experts tasked with monitoring fintech and related emerging technology trends as they relate to its supervisory and payment system mandates, respectively. These new teams include representation from all of the Federal Reserve System's Reserve Banks and have leadership from Board staff. These teams' critical objectives include ensuring that fintech-related information is shared across the Federal Reserve System and is used to inform relevant supervisory, policy, and outreach strategies. We plan to follow up with Federal Reserve staff to obtain updates on these efforts in the future.

    Recommendation: The Chair of the Board of Governors of the Federal Reserve System should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 12)

    Agency Affected: Federal Reserve System: Board of Governors

  13. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 13)

    Agency Affected: Commodity Futures Trading Commission

  14. Status: Open

    Comments: In November 2018 FDIC staff advised us they are working to address this recommendation by the end of 2018. We will follow up with them in the future to determine their progress on these activities.

    Recommendation: The Chairman of the Federal Deposit Insurance Corporation should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 14)

    Agency Affected: Federal Deposit Insurance Corporation

  15. Status: Open

    Comments: In July 2018, NCUA staff indicated that NCUA will evaluate the efficacy of adopting certain knowledge-building initiatives related to financial innovation. We plan to follow up with NCUA staff to obtain updates on these efforts in the future.

    Recommendation: The Chairman of the National Credit Union Administration should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 15)

    Agency Affected: National Credit Union Administration

  16. Status: Open

    Comments: In a May 2018 letter, SEC noted that its staff were actively participating in knowledge-building initiatives with industry participants and fellow regulators, both domestically and internationally. It noted working with market participants, including fintech firms focused on distributed ledger technology, as they seek to develop innovative, new businesses. SEC staff continues to work with market participants to evaluate the applicability of the federal securities laws to fintech activities and. when appropriate, provide guidance as to how such activities can be conducted in compliance with such laws. The letter also indicated that SEC plans to continue their participation in various knowledge-building initiatives with industry participants and fellow regulators. In addition, the SEC Chair has asked the staff to evaluate GAO's recommendation further and consider whether there are any additional steps that the agency can take to augment their knowledge in this area. We plan to follow up with SEC staff to obtain updates on these efforts in the future.

    Recommendation: The Chairman of the Securities and Exchange Commission should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 16)

    Agency Affected: United States Securities and Exchange Commission

 

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