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OCC's New Special-Purpose Charter OCC’s New Special-Purpose Charter Business Opportunities and Challenges for Fintech and Beyond Webcast January 25, 2017 Davis Polk & Wardwell LLP John L. Douglas Lex Sokolin Reuben Grinberg Contact Info John Douglas Partner – Financial Institutions Group DC: 202-962-7126 | NY: 212-450-4145 [email protected] beyondsandbox.com @DavisPolkReg Reuben Grinberg Associate – Financial Institutions Group 212-450-4967 [email protected] Lex Sokolin Global Director – Fintech Strategy [email protected] @autonofintech @lexsokolin 1 Davis Polk & Wardwell Disclaimer © 2017 Davis Polk & Wardwell LLP | 450 Lexington Avenue | New York, NY 10017 This presentation, which we believe may be of interest to our clients and friends of the firm, is for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. This may be considered attorney advertising in some jurisdictions. Please refer to the firm's privacy policy for further details. 2 Autonomous Research Disclaimer AUTONOMOUS SPECIFIC DISCLAIMER: Applicable to sections/ content sourced specific to Autonomous: Please note that the sourced Autonomous information (“information”) presented herein (“Document”) is based on reasonably reliable sources and, or opinion of Autonomous Research LLP, Autonomous Research US LP, and/or Autonomous Research Asia Limited (herein referred to as “Autonomous”). The Autonomous content within this Document may present a number of risks and uncertainties that might cause different results to that stated and events may differ materially from that which is expressed or implied herein. In the event of any such difference, Autonomous assumes no responsibility to update any of the contents or opinions contained in this presentation. The information contained herein should not be interpreted as advice or a solicitation on the purchase or sale of specific financial instruments. Autonomous bears no responsibility in any instance for any loss including any consequential loss which may result from reliance on the information contained herein. The information in this report has been prepared for information purposes only. It does not constitute a personal recommendation, as defined by the applicable regulations in the jurisdictions to which Autonomous is subject (“Regulations”). This Document does not give or purport to give a Research Recommendation and/or Price Target, and thus, applicable regulatory Research Recommendation disclosures relating to the same are not included herein. This material is intended only for investors who are "eligible counterparties" or "professional clients" or “institutional investors” and “professional investors” as defined by the relevant Regulations, and must not be redistributed to retail clients as defined thereunder (“Retail Clients”). 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In Europe: Autonomous Research LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom (500498) and registered in England & Wales (No OC343985). In the US: Autonomous Research US LP is a FINRA registered Broker-Dealer Financial Industry Regulatory Authority (“FINRA”) (CRD# 165290) (www.finra.org) and a Member of SIPC (www.sipc.org.) In Hong Kong: Autonomous Research Asia Limited (CE No. BDP990) is licensed with the Securities and Futures Commission in Hong Kong (“SFC”) to carry out Type 4 (Advising on Securities) Regulated Activities subject to the licensing conditions set forth in the SFC Public Register (http://www.sfc.hk/publicregWeb/corp/BDP990/details). 3 Table of Contents I. Background and Key Considerations II. Implications for Fintech Development and Landscape III. Application to Various Business Models 4 Section I. Background and Key Considerations Background: OCC Special Purpose Charter . December 2016: OCC proposes special purpose national bank charter . Charter holders must engage in receiving deposits, paying checks, and/or lending money . Same privileges / requirements as full national banks . OCC discouraging applications until publication of OCC policy . Follows a year-long series of OCC innovation initiatives . Not a sandbox End of public OCC releases proposal on comment period OCC White “Receiverships on OCC charter Paper on for Uninsured proposal “Supporting National Banks” OCC releases Sens. Merkley (Jan. 17, 2017) Expiration of Responsible OCC Public OCC releases framework for and Brown send By end of 1Q17: Comptroller of Innovation in the Forum on “Responsible granting special letter opposing Anticipated the Currency Federal Banking “Responsible Innovation purpose national OCC Charter opening of OCC Thomas J. System” Innovation” Framework” bank charters (Jan. 9, 2017) Innovation Office Curry’s Term March June September October December January March April 2016 2016 2016 2016 2016 2017 2017 2017 Anticipated Issuance of OCC Policy on Special Purpose Charters 6 Background: Comments on OCC Special Purpose Charter Trade and Consumer State Banking Congress Fintechs Lobbying Advocacy Governments Organizations Members Organizations Organizations Examples of stakeholder comments: • Support the charter as long as consumer laws, including predatory • Violates separation of banking and “existing rules and oversight are lending laws), and the states are commerce applied consistent with those for any better positioned to protect consumers • OCC should better coordinate with national bank” • OCC’s proposal would create an ad other regulators • OCC lacks legal authority to charter hoc, confidential regulatory framework • OCC should avoid unnecessary non-depository national banks with unfettered discretion for the OCC, constraints on fintech charter creating an un-level playing field • OCC lacks expertise to evaluate and recipients, and should avoid using supervise fintechs • Charter would distort the market place chartering process to protect national by allowing the OCC to pick winners banks from competition • OCC should engage in a more formal and losers, promoting regulatory cost/benefit analysis capture, or by promoting larger • Charter would hurt consumers established players at expense of (OCC has preempted other state smaller ones 7 Potential Benefits and Considerations: Overview . Depending on business, financial services companies have three choices: . State-by-state licensing . Structure business to avoid needing a license . Special purpose national bank charter Benefits: Considerations: . Federal preemption of state licensing requirements . State and federal consumer protections . E.g., money transmitter and lending licenses laws still apply . Federal preemption of state usury laws . CRA / financial inclusion obligations . Avoiding legal uncertainties of the “rent-a-bank” model . Initial and ongoing compliance costs . Legal certainty . Change in business plan must be approved . Management focus . Time to market . Increased business opportunities with partners . A relatively inflexible regulatory environment . A regulatory “stamp of approval” . Required Federal Reserve membership . Potential access to services only open to banks (e.g., . BHC status for parent if deposit-taking access to credit card networks) 8 Potential Benefits and Considerations: OCC Supervisory Requirements and Chartering Process . Typical national bank supervisory standards and requirements include: . Limitations on activities to those permitted for a national bank (separation of banking and commerce) . Operation likely subject to an OCC-approved business plan over a 3-year horizon and operating agreement (need approval to change) . Other application / chartering requirements: . Pre-filing consultations
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