Leading global law firm Morgan Lewis recently brought on Kristin Lee, former senior vice president and assistant general counsel in Citi’s bank regulatory group, as a partner, enhancing the firm’s deep experience in financial regulation. In this edition of Fintech Explained, Kristin analyzes the state of play on upcoming fintech policy issues, including bank-fintech partnerships, and previews what’s ahead in 2023.
Tell us about Morgan Lewis’ bank regulatory practice and how you are preparing to advise clients going into 2023.
Morgan Lewis has a 150-member global investment management team that counsels most of the largest financial institutions on all key issues affecting them, with a particular focus on how their businesses operate and are regulated and how this affects their day-to-day dealings with clients and the financial markets. With a growing demand from clients and an evolving regulatory environment, the firm has made a strong investment in building out its bank regulatory capabilities.
Policymakers are keeping a watchful eye on banks and financial institutions, particularly during a time of economic uncertainty and with new players and technology continuing to enter the market. Drawing on a combination of in-house, public, and private sector experience, our team advises clients on key regulatory and enforcement developments coming from US banking regulators, as well as the innovation and development of new products and services. We also work in close collaboration with our fintech, technology, and financial services industry teams, where we are able to keep abreast of regulatory developments not only at the state and federal levels but in key global jurisdictions.
What is on your radar from a regulatory and legislative perspective in 2023?
As a result of the turbulence over the last year, there is a heightened focus on whether specific regulation with respect to digital assets is necessary. While some feel as though this space is largely underregulated and the industry would greatly benefit from a comprehensive US regulatory framework, others believe that existing laws and regulations are adequate. We continue to see bipartisan policy work by legislators, but none have gained sufficient traction to be adopted in the near term.
The federal banking agencies continue to take a careful and cautious approach to digital asset initiatives, recently highlighting crypto-asset risks to banking organizations. We will likely see continued enforcement in this space by various US financial regulators, as each regulator’s jurisdiction over the crypto industry remains uncertain.
We also expect further developments with respect to Federal Reserve master account access. We’ve seen, over the past couple of years, fintechs and other financial technology firms calling for broader access to obtaining master accounts and services with the Federal Reserve. Last summer, the Federal Reserve adopted final guidelines establishing a three-tiered approach to assess master account applicants. Then, in November, in an effort to bring greater transparency, the Fed proposed to periodically publish a list of institutions that have master accounts. After the Fed issued this proposal, Congress adopted a similar requirement, in Section 5708 of the National Defense Authorization Act for Fiscal Year 2023, that the Federal Reserve establish and maintain a public database that shows both which institutions have and have requested master account access. These developments have an eye toward the digital transformation of banking while staying grounded with principles of safety and soundness, and prudential regulation.
The 2023 US regulatory landscape will be exciting to watch!
Bank-fintech partnerships can play a critical role in delivering value to consumers. Recently, federal banking agencies have bolstered oversight of third-party fintech partnerships. What are regulators’ primary concerns?
The recent Treasury Department report finds that bank-fintech partnerships can be positive for consumers but highlights the need for regulators to provide a clear and consistently applied regulatory framework for those partnerships. The regulators are aware that the banking industry continues to become more complex and technologically driven, driving banks to form more numerous and complex relationships with fintech companies to remain competitive, expand operations, and help meet customer needs. The banking agencies are primarily focused on safety and soundness considerations but are also focused on, among other things, overall risk management practices, Bank Secrecy Act (BSA)/anti-money laundering risk management, suspicious activity reporting, and information technology control and risk governance.
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