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In the ever-evolving landscape of financial technology (FinTech), the relationship between traditional banks and FinTech companies has become increasingly important. These partnerships offer innovative solutions, enhance customer experiences, and drive the industry forward. However, such collaborations also come with their fair share of risks and regulatory challenges. In this episode of the Risk Intel Podcast, host Ed Vincent is joined by Alexandra (Alex) Barrage, and Ryan Richardson from Davis Wright Tremaine LLC to delve into the nuances of regulatory guidance surrounding these partnerships and provide insights into the dynamics between banks, FinTechs, and regulatory bodies.
The episode kicks off with an exploration of the journey from the proposal to the final guidance on third-party relationships issued by the Office of the Comptroller of the Currency (OCC),the Federal Reserve (the Fed), and the Federal Deposit Insurance Corporation(FDIC). Alex Barrage highlights the timeline of the guidance, which underwent robust commenting and review before finally being issued. While the final guidance retained many key points from the original proposal, it emphasized a principles-based approach to managing third-party relationships. This approach aims to provide a universal framework applicable across a diverse array of relationships, from consumer-facing FinTech partnerships to software-as-a-service tools.
Ryan Richardson further explores the principles-based approach. He underscores that while it simplifies decision-making and provides a common vocabulary for risk assessment, its flexibility can also be a challenge. Without specific, contextual guidance, banks and FinTechs need to operationalize these principles in their unique relationships, demanding meticulous attention to risk management. This dichotomy between simplicity and operational complexity forms a significant theme throughout the podcast.
One of the critical takeaways from the final guidance is the role of oversight and monitoring in third-party relationships. It’s discussed how regulatory scrutiny has intensified, in the context of Bank Secrecy Act and Anti-Money Laundering(BSA/AML) compliance. Alex Barrage explains that banks are now held accountable for maintaining sufficient oversight, even if certain functions are outsourced to third parties. The monitoring process, which includes the timely and effective digestion of information, emerges as a common challenge for banks and FinTechs alike.
"I think in general we are in a period of pretty intense regulatory scrutiny on these types of relationships (FinTechs)." - Alex Barrage, Partner, Davis Wright Tremaine LLC
Ryan Richardson draws attention to public enforcement actions and consent orders that have arisen due to inadequate oversight and risk management practices. He stresses the importance of institutions digesting the vast amount of information delivered by third parties to identify risks and deficiencies promptly. Both hosts emphasize that accountability rests squarely with the banks, irrespective of their affiliations or outsourced functions. They cite examples like the American Express case, where regulatory action extended to the bank's affiliate for failing to implement controls.
As the podcast episode concludes, it becomes evident that the regulatory landscape surrounding FinTech partnerships remains intricate. The principles-based approach of the final guidance seeks to provide a universal framework, but its successful implementation requires a thorough understanding of the nuances within each relationship. Banks and FinTechs must continue refining their risk management and oversight practices to not only meet regulatory expectations but also foster productive and innovative partnerships that drive the FinTech industry forward.
In partnership with Davis Wright Tremaine LLC, we have put together this interactive FinTech Guidance tool kit that can download here.
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