8 Simple Rules for Accommodating Responsible Innovation

By Nathaniel M. Cartmell, IV on May 3, 2016POSTED IN OCC

From mobile deposits to securing account access with biometric data, financial institutions are interacting with their customers in never-before-seen ways. But long before these advances come to market they must survive regulators’ scrutiny. To effectively screen new developments, regulators must therefore innovate alongside industry. To that end, the Office of the Comptroller of Currency (OCC) recently announced eight guiding principles it will use in developing a framework to support responsible innovation. The OCC used the announcement to define responsible innovation:

The use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank’s overall business strategy.

Those principles are:

1. Support responsible innovation
2. Foster an internal culture receptive to responsible innovation
3. Leverage agency experience & expertise
4. Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers
5. Further safe and sound operations through effective risk management
6. Encourage banks of all sizes to integrate responsible innovation into their strategic planning
7. Promote ongoing dialogue through formal outreach
8. Collaborate with other regulators.

Rather than serve as binding rules, these principles are meant to act as a guide to the OCC as it creates a framework for evaluating the innovations its regulated entities develop and as a catalyst for comments and engagement by the banks who will soon be affected by the structure the OCC puts in place.

The OCC announcement also explained what lay behind the adoption of each principle. Coupled with the OCC’s public remarks on innovation, e.g. here and here, each explanation offers some clues into how the agency views its role in accommodating financial technology innovations among nationally chartered financial institutions:

1. Support responsible innovationHere, the OCC seems to be signaling that it is on the same side as industry when it comes to innovation. Through this principle, the OCC seems willing to question whether its regulatory processes facilitate or impede responsible innovation by banks. One concrete proposal from the announcement was re-examining the channels of communication with regulated entities to determine whether informal contacts would more effectively promote responsible innovation.
2. Foster an internal culture receptive to responsible innovationOne implication of this principle is an acknowledgment that the OCC may have to reorient its agency culture before it can support responsible innovation. The announcement highlights four perceptions revealed by a survey of OCC-regulated entities and other industry observers that suggest the necessity of this change: First, that the OCC possesses a low risk tolerance for innovation; second, that the agency vetting process may inadvertently discourage innovation; third, that the OCC must increase its awareness and education regarding innovation; and fourth, that agency employees seek more and easier access to expert resources.
3. Leverage agency experience and expertiseWhat the OCC may lack in innovative instincts it makes up for in institutional industry knowledge. This principle asserts that one way the agency can support responsible innovation is through leveraging the OCC’s familiarity with the strategies, goals, and risk tolerances of the businesses it regulates. In other words, the OCC can help banks determine whether a new idea is actually a good idea. One actionable proposal from the announcement is the establishment of a lead expert program supporting responsible innovation, modeled on the successful lead expert programs in areas such as compliance, asset management, and operational risk.
4. Encourage responsible innovation that provides fair access to financial services and fair treatment of consumerThe OCC is not limited to accomplishing its regulatory goals with a stick. A carrot works too. In this case, that might take the form of publicizing those banks whose innovative products, services, and processes would expand access or increase use among underbanked populations. This principle appears to provide the OCC with a way to ensure that innovation strengthens banks’ public purpose of promoting fair access to financial services and fair treatment of consumers.
5. Further safe and sound operations through effective risk managementEven as the OCC adapts to the pace of innovation, adopting this principle suggests that it will not do so at the expense of its core competency: help banks identify, assess, and mitigate the potential risks to the stability and soundness of the banking system posed by new technology.
6. Encourage banks of all sizes to integrate responsible innovation into their strategic planning.With this principle, the OCC seems to be indicating that it cannot realize the goal of responsible innovation alone. Banks must factor it into their strategic planning as well. Thus, the announcement explains that one plank of any OCC review of proposed innovations will consider how the advance factors into the business’s long-term plans and strategic objectives. Innovation that merely reflects fads or trends without regard to the specific business’s interests will not be embraced.
7. Promote ongoing dialogue through formal outreachA one-way conversation on responsible innovation would stifle progress almost as surely as failing to support innovation at all. Adopting this principle suggests that the OCC will engage with a diverse group of stakeholders in plotting its course on responsible innovation.
8. Collaborate with other regulatorsThe OCC’s last principle reflects an awareness that its oversight does not occur within a vacuum and that its regulated entities are subject to the concerns of other regulators. Through partnership with the CFPB and other agencies, the OCC can minimize regulatory burden while ensuring comprehensive supervision in fulfillment of its regulatory mission.

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