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Regulators Turn Focus on Consumer Duty and Controls at Challenger Banks

Last week, the Consumer Financial Protection Bureau (CFPB) announced that it will start using a largely unused legal provision to examine nonbank financial companies that pose risks to consumers. According to its director, “given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held to.” The rule gives the CFPB fairly wide authority to supervise nonbanks engaged in consumer-facing financial services based on potential risk. And it comes as big banks ratchet up pressure on policymakers for increased regulation of fintechs claiming that “nonbanks are getting away with ‘regulatory arbitrage,’ avoiding requirements traditional banks face.” And in the midst of growing concern from regulators that some of these newer entrants may have more lax controls than those of established bank, the CFPB wasn’t the only regulatory body that specified its heightened interest in emerging technologies this month as the UK’s Financial Conduct Authority issued a thinly veiled warning to challenger banks.

In a report last week, the FCA published the findings of its review of financial crime controls at six relatively new and primarily digital challenger banks, which represent over 50% of the relevant challenger firms, that all offer similar products to traditional retail banks. In its announcement, the FCA stated that its review uncovered deficiencies in financial crime controls and that the start-ups “lack checks on financial crime risk, including getting around the kind of sanctions recently imposed on Russia.” And “going forward, the FCA said it expects challenger banks to develop their defenses against financial crime to reflect their user growth, and adapt their due diligence measures to take the heightened risk of sanctions evasion into account.” It wasn’t all doom and gloom for the upstarts though, the FCA stated that their “financial crime reviews found some evidence of good practice, [highlighting] for example innovative use of technology,” and the “effective and innovative uses of data and information challenger banks collected to mitigate risks.”

The FinTech industry is at a critical juncture. On the one hand, new financial and regulatory technologies are opening up previously unavailable paths to financial inclusion, economic development and more. Nevertheless, there needs to be a balance between these new opportunities and grappling with some of the associated regulatory compliance challenges. With recent developments, the upstarts should consider themselves put on notice that they must have adequate resources in place to ensure that they satisfy regulatory requirements or else, the regulators will inevitably take notice as well.

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