Fintech
McKernan, Chopra Want Clearer Guidance for Banking-Fintech Industry
“That guidance, at least as I read it, is actually more tailored to the services that a bank gets, rather than working through a service provider or having a service provider work on behalf of a bank,” McKernan said. “We may have an opportunity to think about some business-specific guidance within this third-party risk management framework that is more clearly articulated.[,] ideally also some clear, hard rules of the road, as we think about certain kinds of large partnerships. … I think that’s a promising thing to explore.”
At the Dragon/Bloomberg
WASHINGTON — Federal Deposit Insurance Corp. board member Jonathan McKernan on Wednesday suggested that regulators consider making their guidance on third-party risks more specific in order to foster innovation and competition in the financial services industry.
“That guidance, at least as I read it, is actually more tailored to the services that a bank gets, rather than working through a service provider or having a service provider work on behalf of a bank,” McKernan said. “We may have an opportunity to think about some business-specific guidance within this third-party risk management framework that is more clearly articulated.[,] ideally also some clear, hard rules of the road, as we think about certain kinds of large partnerships. … I think that’s a promising thing to explore.”
The remarks, delivered to an audience at Semafor’s “Banking on the Future: The Next Era of Fintech” conference, highlight the growing involvement of regulators in analyzing banks’ growing reliance on partnerships with fintech firms.
In June 2023, the federal banking regulators, the Federal Reserve and the Office of the Comptroller of the Currency, along with the FDIC, provided a set of risk-based principles that banks should use when developing relationships with third parties.. The guidance establishes the importance of thorough risk management practices, tailored to the risk and complexity of each third-party relationship. The agency’s recommendations to banks include developing contingency plans to manage or terminate third-party relationships, as well as monitoring such partners for safety and soundness or legal compliance.
McKernan’s call for clearer, asset-based guidance echoed a statement made earlier in the day by his fellow FDIC board member, Consumer Financial Protection Bureau Director Rohit Chopra, whose agency regulates fintechs for compliance with consumer protection laws. At the conference, Chopra advocated examining current rules to ensure they allow new fintech entrants to compete with established participants. He noted that the current complexity of the rules makes it difficult for small entrants to make decisions.
“One of the things we’re trying to do is try to answer the call to make sure that fintech companies, startups and future companies that don’t exist, don’t have to deal with extortion from lawyers around them trying to get money out of them by waving this flag of uncertainty,” he said. “The rules need to be clearer, they need to be simpler, and they need to not be designed just for the biggest incumbents, which I think is a bit of a system that we have.”
McKernan then supported the spirit of Chopra’s call to lower barriers for companies to enter the banking-fintech sector.
“It is important that we ensure that this regulatory framework does not empower incumbents,” he said. “It does not place undue barriers to entry or unduly impede innovation.”
Much of the banking regulatory action over the past year at the FDIC has come against the backdrop of a scandal after a A series of Wall Street Journal stories have detailed serious workplace misconduct issues at the agency spanning decades.
Following the report, the FDIC responded by establishing a special committee to investigate the claims, appointing FDIC board members Michael Hsu and McKernan to lead the investigation. The law firm Cleary Gottlieb Steen & Hamilton was ultimately chosen to undertake the independent review, the findings of which were published last month, largely corroborating the findings of the Wall Street Journal investigation. After subsequent congressional hearings on the report and calls for his resignation, current FDIC Chairman Martin Gruenberg announced that he would step down upon his replacement, who has since been appointed but awaits Senate confirmation in an election year.
McKernan responded to questions about the FDIC’s ongoing efforts to reform its culture in the wake of the reports. The FDIC official stressed the need for a rapid leadership change at the agency to boost staff morale and retention. McKernan noted that the FDIC inspector general has flagged human resources issues, particularly retention, as one of the most pressing strategic risks.
“We really need a fresh start at the top… if we don’t do that, I think it will really test our ability to deliver on our mission of safety and soundness, consumer protection and financial stability,” he said. “I think it’s really important that the entire Board of Directors step up during this interim period, while we wait to confirm a new chairman, we need to have the entire Board engaged, ideally on a nonpartisan basis, to make our cultural transformation happen.”