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Fintech in Brief: FDIC Proposes Financial Technology Standard Setting and Certification System
Print PDFOn July 20, 2020, the Federal Deposit Insurance Corporation (the FDIC or the Agency) issued a Request for Information (RFI) on a proposed voluntary public/private standard setting and certification system to promote the efficient and effective adoption of innovative technologies at FDIC-supervised financial institutions. The RFI is the latest product of FDIC Chairman Jelena McWilliams’ FDiTech Initiative, the Agency’s broad financial technology strategy.
The RFI represents a potential sea change in policy by the FDIC. It signals a possible greater involvement by federal regulators in vetting new third-party models and technologies for use by banks. Community banks, in particular, may be challenged in meeting existing third party management due diligence requirements when they consider adopting new financial technologies. The FDIC is responding to concerns voiced by many institutions over the costs of vetting, validating, and assessing models or technologies from third parties, which may be prohibitive. The RFI proposes a voluntary public/private standard setting system as a potential solution to this problem.
In the past, federal bank regulators were hesitant to get involved in the selection or endorsement of specific technologies for fear of stifling innovation by banks and Fintechs and anti-competitive considerations. The approach was to issue guidance for banks to consider as they individually evaluated specific products and services. In 2017, the Office of the Comptroller of the Currency recognized the cost and complexity of doing so and clarified its requirements for community banks, encouraging them to collaborate with other banks in this area.
The RFI asks for public and industry comment on the following topics:
- Whether the proposed voluntary public/private standard setting system would reduce the regulatory and operational uncertainty that may prevent financial institutions from deploying new technology or entering partnerships with technology firms, including Fintechs.
- Whether a voluntary certification program could help standardize due diligence practices and reduce associated costs for financial institutions that choose to use the system.
- Whether a public/private partnership model has the potential to help promote innovation across the banking sector and streamline what can be a costly and duplicative system for both banks and technology firms given rapid technological developments and evolving consumer behaviors in banking.
The FDIC is accepting comments on the RFI for 60 days from publication in the Federal Register. Based upon comments received, it is possible the FDIC will pursue a formal rulemaking to implement a voluntary public/private standard setting and certification system.
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.
