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PeerIQ Weekly Update: November 20, 2016

By Vy Phan

November 20, 2016

PeerIQ leaders spent the week in Washington discussing the future of FinTech under a new regulatory regime. 

In this “PeerIQ Goes to Washington” newsletter, we synthesize our findings from dozens of conversations with market regulators and industry participants. Specifically, we discuss the likely direction of SEC leadership, what to look for in the OCC charter, and legislation that may alter the financial regulatory landscape.

The SEC opened up the week with the FinTech Forum. Chair Mary Jo White’s opening comments acknowledged that marketplace lending is “providing individuals and small business with new paths to access capital” - sharing a key finding of the US Treasury.

Chair White made the case for more transparency to improve investor protection: “a key challenge is the adequacy of the information available to investors to make informed investment decisions, such as information about the loans and borrowers underlying their investments, as well as the platform’s proprietary risk and lending models.”

On the capital formation panel, in response to Sebastian Gomez’s (SEC Head of Office of Small Business Finance) opening question on what innovation is driving capital formation, PeerIQ CEO, Ram Ahluwalia, noted:

The SEC Makes a Bid for Regulating FinTech

SEC Commissioner Piwowar remarked that the “Commission should take the lead regulatory role in the FinTech space,” noting that the SEC is the sole agency that explicitly includes capital formation as a mandate (among other rationale). 
Piwowar also argued that current regulatory structure hinders FinTech innovation:

“As is obvious to any market participant or observer, our financial regulatory structure is a fragmented, sometimes contradictory, alphabet soup. A recent study by Georgetown University’s McDonough School of Business Center for Financial Markets Policy correctly points out that the most common regulatory struggle for FinTech firms in the United States 'does not concern a specific regulation or regulator, but rather the extremely complex process of navigating multiple regulatory portals.'”

SEC Chair Candidates are Constructive on Securitization
SEC Commissioner Piwowar and former Commissioner Gallagher are rumored to be leading candidates for the next SEC Chair. 

Based on public comments from both Commissioners, we would expect a shift in SEC policy from prescriptive risk management to a disclosure regime.  

At ABS Vegas last year, Commissioner Piwowar cautioned on the potential for inappropriate regulation to stifle securitization and, by extension, credit extension:

 “…we must keep in mind that unnecessary or inappropriate regulation of securitizations may lead to less availability of capital, increased borrowing rates, and a more limited supply of credit. These effects are likely to be passed on to borrowers, either in terms of increased borrowing costs or loss of access to credit, and thus will cut directly against the benefits of securitization.” 

Piwowar also opposed the blunt, across-the-board 5% risk retention rule:

"Rather than carefully examining these attributes to determine an optimal credit risk retention rate for each asset class, prudential regulators in Washington, D.C., took the easy way out – they simply set it at the maximum statutory rate and ignored the authorization from Congress to create lower risk retention requirements or use alternative methods to align interests.”

 Piwowar noted the "transformational impact" of FinTech and is also supportive of a regulatory sandbox, similar to models in the UK:

 "FinTech is frequently lauded as a disruptive force that is transforming the financial services industry, and that is clearly true.. . .We should also explore various constructs that have been proposed, both domestically and internationally, to encourage FinTech innovations without creating undue risks to the marketplace or imposing artificial limits on activities (e.g., regulatory sandboxes)."

 Piwowar also dissented on the current version of the Volcker rule citing its the lack of public comment, economic analysis, and differences in proposed rule vs. initial language.

Another candidate floated for the Chair position is former Commissioner Daniel Gallagher. Gallagher would likely re-focus the SEC on equity market structure and corporate disclosure rules. Gallagher is also sharply critical of the Volcker rule and risk retention. Gallagher also is critical of the qualified mortgage rule which may be limiting the size of the mortgage market.

OCC Charter

The Office of the Comptroller of the Currency (OCC) is a prudential supervisor that charters, regulates, and supervises all national banks and federal savings associations as well as federal branches. The OCC is an independent bureau of the U.S. Department of the Treasury.

 The OCC is expected to publish a paper on a possible FinTech charter later this year. We can only guess at the contents of the OCC charter. Here are the core terms to look for:

screen-shot-2016-11-20-at-11-07-03-pm The OCC may be able to issue a final rule before the end of Comptroller of the Currency Thomas Curry’s term in April, although timing will be tight. More likely, a Trump-appointed comptroller would pick up the issue.We observe that Peter Thiel, an active FinTech investor, is on the Trump transition team. Regulatory prognosticators see no reason why the subsequent Comptroller would oppose a charter.

Legislative Pendulum Swinging Back

We expect major banks, asset managers, and insurers to challenge the "systemically important designation" which places a capital surcharge on institutions deemed systemically important by FSOC.The following pieces of legislation are attracting attention in the FinTech and banking community.

Potential for Relaxing Capital and Liquidity Rules As we noted in our March 2016 analysis, we believe current and pending capital and liquidity rules, particularly when combined, will have the negative effect of deterring banks from holding and making markets in ABS. Specifically: The consequences of current and proposed regulations are significant as banks currently hold around 15-20% of ABS at any given time. Indeed, banks are responding to incentives by shrinking balance sheets and shedding liquidity-providing or lending businesses that cannot clear ROE hurdles after capital charges.  We expect policy makers will re-examine the above rules while maintaining post-2008 regulations that reduce informational asymmetries and promote price discovery. Against this evolving regulatory landscape, platforms such as PeerIQ will play a role in enabling consumer and small business credit to successfully fund via the capital markets. Conferences: PeerIQ in the News: Industry Update: Lighter Fare: