WASHINGTON — Federal Deposit Insurance Corp. Board Member Jonathan McKernan Wednesday suggested regulators consider making their third-party risk guidance more specific in order to foster innovation and competition in the financial services sector.
"That guidance, at least as I read it, it's really tailored most to the services that a bank obtains as opposed to working through a service provider, or having a service provider that works on behalf of a bank," McKernan said, "There may be opportunities for us to think about activity specific guidance under this framework of third-party risk management that articulates with maybe greater clarity[,] ideally even some black and white rules of the road — how we think about certain sorts of big partnerships. … I think that's a promising thing to explore."
The remarks, delivered to an audience at Semafor's Banking on the Future: The Next Era of Fintech conference, highlight the growing involvement of regulators in scrutinizing the increasing dependence of banks on partnerships with fintech companies.
McKernan's plea for clearer activities-based guidance echoed a statement earlier in the day by his fellow FDIC board member, Consumer Financial Protection Bureau Director Rohit Chopra, whose agency regulates fintechs for compliance with consumer protection laws. At the conference, Chopra endorsed examining current rules to ensure they enable new entrants in the fintech space to compete with established participants. He noted that the current complexity of the rules makes it difficult for smaller entrants to make decisions.
"One of the things we try and do is we have tried to answer the call of making sure that fintech companies, startups, and future firms that don't exist, don't have to deal with the shakedown of lawyers that are circling them trying to get money from them by waving this flag of uncertainty," he said. "The rules need to have brighter lines, they need to be simpler, and they don't need to be designed just for the very biggest incumbents, which I think is a little bit of a system that we have."
McKernan later seconded the spirit of Chopra's call to lower the barriers for companies looking to break into the bank-fintech space.
"It's important that we make sure that this regulatory framework does not entrench the incumbents," he said. "Does not pose undue barriers to entry, unduly impose an impediment to innovation."
Much of the bank regulatory action over the last year at the FDIC has come amid the backdrop of scandal after a
Following the reporting, the FDIC responded by establishing a special committee to investigate these claims, appointing FDIC board members Michael Hsu and McKernan to lead the investigation. Law firm Cleary Gottlieb Steen & Hamilton ultimately was tapped to undertake the independent review, the results of which were published last month, largely corroborating the findings of The Wall Street Journal investigation. After subsequent congressional hearings on the report and calls to resign, current FDIC Chair Martin Gruenberg announced he would resign upon his replacement, who has since been nominated but awaits Senate confirmation in an election year.
McKernan fielded questions about the FDIC's ongoing effort to reform its culture in the wake of the reports. The FDIC official stressed the need for a swift change of leadership at the agency to promote staff morale and retention. McKernan noted that the inspector general for the FDIC has flagged human resource issues, particularly retention, as one of its most pressing strategic risks.
"We really need a fresh start at the top … if we don't do that, I think it really will challenge our ability to execute on safety and soundness, consumer protection and financial stability mission," he said. "I think it's really important that the full Board step up during this interim period, while we're waiting to confirm a new chair, we have to have the full board engaged, ideally on a nonpartisan basis, to execute on our culture transformation."
