Federal: Advocacy Letter to the Federal Reserve on the Novel Activities Supervision Program (NASP) Implementation

The Honorable Michael S. Barr
Vice Chair for Supervision
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551

‍Re: Novel Activities Supervision Program Implementation

Dear Vice Chair Barr:

The American Fintech Council (AFC) thanks you for the opportunity to collaborate with the Federal Reserve in providing clarity on novel bank activities as the Federal Reserve proceeds with its Novel Activities Supervision Program (NASP).‍

AFC and its Mission

AFC is the premier trade association representing the largest financial technology (Fintech) companies and the innovative banks that power them. Our mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by supporting responsible innovation in Fintech and encouraging sound public policy. AFC members are at the forefront of fostering competition in consumer finance and pioneering ways to better serve underserved consumer segments and geographies. Our members are also lowering the cost of financial transactions, allowing them to help meet demand for high-quality, affordable products.‍

Novel Activities Supervision Program

The Federal Reserve's newly created Novel Activities Supervision Program reflects the growing role of technology and innovation in the financial services sector. AFC is supportive of the Federal Reserve's efforts in ensuring the safety and soundness of the nation's financial institutions are maintained, while recognizing the benefits of new technology and innovation that have been shown to increase competition, bring down costs for services, increase efficiency, and reach consumers historically left behind by the traditional financial system. We appreciate the Federal Reserve’s commitment to ensuring the NASP complements existing supervisory activities, working within existing supervisory portfolios and partnering with dedicated supervisory teams that have knowledge on the supervised firm’s risk profile.

The information conveyed in the Federal Reserve’s August 8th guidance and your subsequent speech on the matter have provided some important clarifications regarding the scope of and priorities for the NASP by enumerating the specific areas of focus for NASP supervisory staff (i.e., cryptoassets, distributed ledger technology, and complex technology-driven partnerships with nonbanks and Fintech companies).2 However, broadly defining the focus areas of the NASP falls short of providing the transparency necessary to ensure effective engagement with industry participants under the Federal Reserve’s jurisdiction. To ensure effective implementation of the NASP, AFC believes that additional transparency and consideration is needed, particularly regarding the qualitative standards for determining a covered firm’s inclusion under the NASP, guidelines on the program’s implementation and structure, and supervisory expectations pertaining to specific types of novel activities governed by NASP. Critically, it’s important that the Federal Reserve develop and publish guidance and standards prior to enforcing supervisory views on institutions engaged in novel activities and that these standards take into account the nuances that exist in the enumerated novel activities.‍

AFC Urges More Transparency in the NASP and firms covered by the program.‍

AFC recognizes that the NASP was developed to ensure the latest innovations being applied to the financial services landscape are given appropriate supervisory transparency and ample opportunity for regulatory review by staff that has deeper experience in the more technical and nuanced aspects of financial services. While AFC is supportive of the Federal Reserve’s work on establishing and implementing the NASP, we recommend that the agency continue to provide as much public information and engage the financial services industry in collaborative discussions on the guidance, standards, and peer group measurements that are under consideration well before they are finalized. One potential way to accomplish this task is to publish a non-exhaustive list of firms, activities, or arrangements covered by NASP and a set of standards that outline what may or shall result in a company’s inclusion under the program. This will allow companies to be informed as to the general types of activities or business arrangements that are viewed as novel under the program and the information and/or compliance requirements that may arise.‍

The Federal Reserve should proceed with its plan to publish more guidance and decisions on "novel" activity and publish supervisory standards in advance of any enforcement activities.‍

AFC recommends that the Federal Reserve publish robust standards detailing the supervisory approach to novel activities and how they will be governed. For example, it will be useful to have full clarity on standards and guardrails with respect to bank/non-bank partnerships and the permissibility of crypto-related activities. AFC supports the Federal Reserve’s acknowledgement of the need for knowledge acquisition and standards development as NASP proceeds. Clear and congruent rules and guidance from regulators will help augment existing frameworks on how financial institutions can function in responsible and systematically sound ways to benefit both consumers and the financial services system. Establishing clear expectations and requirements for novel activities is essential in assisting firms to quickly determine whether a program or opportunity as well as its scale would fall within an institution’s risk and technical capabilities, while ensuring a balanced playing field for both new and existing market participants. As the Federal Reserve builds information, AFC urges that the agency publish additional supervisory standards to ensure similar supervisory messages are applied across regulated financial institutions.‍

AFC urges the Federal Reserve as it forms Policy to acknowledge the Diversity and Complexity of Novel Activities.

Supervisory groups are generally established to create cohorts of peer institutions with similar activities that can be assessed on a horizontal basis, and often firms are encouraged to adopt the "best practices" of the group. The scale and scope of an activity is often more critical to understanding their potential risk than simply classifying the problem they are trying to solve. Treating all activities, regardless of intent, scale, demographics, and geography as the same, can create unintended disparate treatment where only those fintechs or partnerships that can afford to be amply funded can meet the new standard. The impact of this approach is not aligned to the goal of many of the novel activities driving the Fintech space – using innovation to widen access to underserved people and markets that are too costly or inefficient for traditional market players to serve. Specifically, as it relates to the NASP’s focus on technology-driven partnerships with nonbanks and Fintech companies, there are a myriad of business, models, use cases, and degrees of engagement between banks and their nonbank or Fintech company partners. These varied business models, use cases, and degrees of engagement are primarily driven by contractual terms that were negotiated in response to the firms’ internal decision-making and reaction to external market forces making no two partnership models identical. We appreciate that the Federal Reserve is attempting to avoid a “cookie cutter” approach to diverse institutions and partnership arrangements. In this vein, AFC believes that it would be prudent for the Federal Reserve to recognize the nuance within its internal examination processes and staff trainings, and we recommend that the Federal Reserve continue to ensure that examiners consider each company’s unique position/set of activities.

AFC and its members appreciate the opportunity to provide more insights with the Federal Reserve on these matters as the NASP proceeds. Thank you for your consideration.

Sincerely,

Phil Goldfeder
CEO, American Fintech Council

Cc: The Honorable Jerome H. Powell, Chair of the Board of Governors of the Federal Reserve System