Talking Fintech; Gensler Warns Lawyers About Crypto; FDIC Staff Unhappy With Gruenberg's Listening Tour
Capitol Account: Free Weekly Version
There was lots going on this week in financial regulation. House Financial Services Chairman Patrick McHenry’s retirement announcement wasn’t all that surprising, but many in finance lamented his decision. On the other side of the Capitol, the CEOs of the biggest banks appeared for their annual pillorying. The hearing didn’t live up to the hype, though Jamie Dimon (as usual) gave some great comments. Gary Gensler, meanwhile, had an interesting debate about digital assets with a group of securities lawyers. The SEC chief, never a crypto booster, has become a lot more pointed lately in his criticism. We also checked in on the FDIC scandal and found out that the chairman’s promise to visit the agency’s regional offices isn’t going over that well with employees. For our Friday interview, we delved into fintech policy with a trade group CEO.
Thank you for subscribing to out free edition, a digest of articles we published throughout the week. The daily newsletter had many more. Click the button below to upgrade to our paid product.
Friday Q and A: Fintech is, perhaps, an overused buzzword. But there’s also no question that upstart technology firms are making big inroads in financial services – upending norms, but also raising important questions about regulation. While consumer protection issues may be the most prominent, it’s not just CFPB Director Rohit Chopra who has fintech in his sights. The Fed, OCC and FDIC are grappling with the digital disruption of banking and payments. Congress, too, has a great interest, both pro and con.
We sat down with Phil Goldfeder, the CEO of the American Fintech Council, to get his thoughts on how Washington is dealing with the burst of financial innovation. One of the trade group’s top priorities is setting standards designed to promote consistent industry practices – weeding out the bad actors and, hopefully, gaining more acceptance for services like buy now, pay later (which lets customers pay in installments) and earned wage access (where employees can receive some of their salary before payday). Not surprisingly, those products have also garnered attention from regulators.
Goldfeder was hired by AFC in February and commutes between D.C. and his home in New York. A former member of the New York State Assembly, he’s also worked as a senior advisor for Sen. Charles Schumer and Mayor Mike Bloomberg. Read on for his take on Chopra, “regulatory modernization” and why big banks are struggling with fintech. Also learn why he still needs to use a little bit of cash. What follows is our (lightly edited and condensed) conversation.
Capitol Account: We’ve always had a problem when writing about financial technology – how do you define it?
Phil Goldfeder: Fintech is about innovating financial services, period. So then the next question is: what does that mean, innovating financial services? Well, it means doing something very, very different than everybody else.
CA: Tell us about your group.
PG: The American Fintech Council started as the Marketplace Lenders Association…because fintech in 2015 was essentially online lending – the concept of, I don't want to go into a bank for a consumer loan...In the aftermath of the recession, companies like Lending Club, Prosper and Funding Circle [were emerging]. As traditional banks and large financials were de-risking, fintech and innovators said: `Wait a second, we can work with banks, we can understand the regulatory structure. We can offer these exact same products, but in a quicker, faster, cheaper, more transparent, more affordable way.’
CA: Why did they need a trade association?
PG: The challenge back then was to make consumers feel safe. Is this loan safe? Are they going to steal my information? Am I going to get hit with fees? How do you define the good actors and the bad actors?...That's why the Marketplace Lenders Association was created….Obviously now, it’s no longer just about marketplace lending. It’s about earned wage access, buy now, pay later, bank-fintech partnerships, banking as a service, the payments ecosystem.
CA: As you say, the fintech universe and its issues have exploded over the past decade. How do you deal with that now that you represent all sorts of different members?
PG: Oh God, I'm still trying to figure that answer out. Only kidding…What differentiates the American Fintech Council as a trade association is two very distinct things. Number one is we represent every piece of the ecosystem – all the business verticals, banks of all different sizes, more mature [companies], less mature [companies]...We represent the entire life cycle of financial services, and all the pieces of the puzzle. The second thing that makes us very different is our commitment to regulatory best practice. Period. Full stop.
CA: That’s very emphatic.
PG: For any member that comes through our doors – it doesn't matter what you're offering in fintech – you must be committed to industry best practice and committed to working with regulators…That is literally because we're not about fintech for fintech’s sake. We're not like a lot of trade associations that are built to protect the legacy systems…I represent entrepreneurs who are trying to break systems – who are trying to change the status quo.
CA: Aren’t the large, traditional banks embracing fintech more and more?
PG: I think the challenge the bigger banks are having is, it's like turning a battleship. You've got to change a hundred years of legacy regulatory structures, systems and so on. They recognize they need to, and you're hearing that more and more. You've heard that from Jamie Dimon…But it's not an easy thing to do, and when they try – as you see with Goldman Sachs with Marcus and some of the other things they try to do – they fail miserably.
CA: Some of these innovations, however, can look iffy to regulators worried about consumers paying high fees, say, or getting trapped in a cycle of debt.
PG: We're trying to draw that line in the sand – what defines a responsible innovator providing critical access to financial services versus a company that is preying on a family in their most difficult time of need to offer them a product they clearly can't afford…We believe there are fintech companies who are doing bad things. Our goal is to create that brick wall. Then we'll work with our companies, we'll work with policy makers, we'll work with regulators to build the regulatory structure, or to fit within a regulatory structure when appropriate.
CA: So regulation may help promote acceptance of some of these novel products?
PG: That's exactly right…The way we think about it is, we don't want no regulation, we want regulatory modernization. We want to modernize the regulatory structure.
CA: How easy is that, given that some of these agencies are pretty stodgy.
PG: It's very hard. I don't know if you've been following the saga at the FDIC? There was a Wall Street Journal article a couple of weeks ago where it said the average employee at the FDIC has been there 25 years. It starts to beg the question, right?…I give the Fed and the OCC credit, they've built out innovation offices within their organizations. The FDIC has not. They've taken the position of burying their head in the sand, unfortunately.
CA: What do you think of Chopra? He seems to be Enemy No. 1 for most of finance.
PG: You're going to get a very interesting take from me – different than any other industry association. I don't always agree with everything Director Chopra says, but I have nothing but admiration and appreciation for his willingness to engage in meaningful dialogue. And we have seen that meaningful dialogue lead to collaboration and pragmatic adjustments to certain regulatory structures. Industry loves to beat up on an aggressive regulator. We look at it differently. Director Chopra and his entire team have made themselves aggressively available to us…We did a policy summit in D.C. He came personally, he spoke, he did a Q&A and then he stayed to mingle at our happy hour. To me, that's very telling….(Friday)
Thanks for reading. Follow us on X @CapitolAccount and on LinkedIn by clicking here. We’re always looking for stories, so if you have any suggestions on what we should cover (or comments about Capitol Account), shoot us a note. Jesse can be reached at: jwestbrook@capitolaccountdc.com, Rob at: rschmidt@capitolaccountdc.com and Jessica at: jholzer@capitolaccountdc.com. If somebody forwarded this to you and you’d like to subscribe, hit the button below. Please email for our special rates for government employees and academics, and group discounts for businesses: subscriptions@capitolaccountdc.com
Getting Tougher on Tokens: The SEC chair reflected today on his push to improve corporate governance – setting new rules during his tenure on executive pay, insider trading, beneficial ownership and proxy voting – to “align the interests of managers with those of shareholders” and “build trust in the markets.”
But as is often the case, his denunciation of cryptocurrency was a little more newsworthy. (The SEC chief even made it clear that he has problems with the name: “Is it a currency, or can we call it crypto tokens?” he asked. “Have you ever used it to buy a cup of coffee?”)
Speaking to a group of securities lawyers, Gensler seemed at first reluctant to discuss the hot-button topic, which he pointed out is a relatively tiny slice of the financial markets. It gets outsized interest from the media, he said, because it “drives a lot of clicks on the journalists who follow the SEC.” Still, he warmed up quickly when asked whether the government will eventually develop a regulatory regime for digital assets.
“It already exists, we have rules of the road on how you register and raise money from the public,” Gensler said, listing a few. “As lawyers, I hope you know these laws. I’m at the American Bar Association.” Noting that the event had a continuing legal education component, he added: “I know there’s a continuing education, so I’m glad to give you this continuing education: There is nothing incompatible about storing an investment contract security on a digital ledger called a blockchain with the securities laws.”
Though he’s not a lawyer himself (but by now after leading the SEC and CFTC could convincingly play one), Gensler also dismissed the contention that there is a “gray area” in the law about whether tokens or trading platforms need to register with the agency. The question is being debated in the federal courts, but he said he was “pretty confident” about the outcome. “You all are going to look back on this, and those of you who have clients are going to go, `What happened here?’”
The chair at one point asked for a show of hands from the lawyers in attendance who had crypto clients, estimating that it was some 40 percent of the room. “You’re gatekeepers, and often you are working with folks who are noncompliant with the law,” he remarked. “And not just dozens, but hundreds of companies have defrauded the public around the world, in this field,” the chair added, pointing out that there have been numerous bankruptcies as well – “not just FTX.”
Gensler concluded with this message to the gathered attorneys, a number of whom formerly worked at the SEC:
“That’s your field, if those are your clients…without pre-judging any one of them. And the public if they lose trust in this little area, this little corner of the market, and you as gatekeepers facilitate that? That hurts the rest of the market, too…(Thursday)
Stay Home: As he scrambled to contain the fallout from the FDIC’s toxic workplace scandal last month, Martin Gruenberg filmed a somber internal video message where he took full responsibility for what had gone wrong and committed to getting the regulator back on track. As a first step, the chairman stressed that he would soon be visiting all the FDIC’s regional offices so he could hear from employees directly.
The response thus far? Thanks, but no thanks.
A number of workers outside Washington, according to agency sources, have been telling their managers in recent days that they aren’t interested in meeting with the embattled FDIC chief. Their general message: Gruenberg should focus his attention on cleaning up the mess – before embarking on a cross-country listening tour. One employee underscored that the antipathy for the chairman is matched by a desire not to attend in-person meetings. “We don’t like coming into the office,” the person noted.
Indeed as the anonymous staffer pointedly noted, the frosty reception to Gruenberg’s plans stems largely from his demand this summer that staff return to the office three days a week by January. The directive sparked an outcry, which has been compounded by a protracted fight with the FDIC union over a telework agreement.
Though it’s a side issue to the broader scandal that Gruenberg is confronting now, the squabble has left the chairman with diminished support from the rank-and-file as he tries to boost morale following the Nov. 13 Wall Street Journal article that revealed multiple examples of sexual harassment at the FDIC going back years. Another Journal story faulted Gruenberg directly, suggesting that he tolerated a culture of abuse at the agency and personally berated an employee. (In his Nov. 17 video, the chairman said he would also address his “own shortcomings.”)
Adding to the pressure, the official inquiries into FDIC misconduct keep multiplying. On Friday, the House Oversight Committee announced it would probe the matter. That’s on top of investigations from the House Financial Services Committee, the FDIC’s inspector general and an outside law firm hired by the agency. Republican Sen. Joni Ernst has also called on Gruenberg to hand over numerous records pertaining to any legal settlements and non-disclosure agreements related to alleged wrongdoing at the agency.
The FDIC didn’t respond to a request for comment.
While less headline-grabbing, the workforce unrest threatens to make it much more difficult for Gruenberg to steady the ship – and he appears to recognize how the two issues are entwined. Last week, in what some took as a pre-emptive olive branch, FDIC management announced that the mandatory return to office policy would be pushed back by six months to July 15.
It’s not clear if the delay will fix the situation. The union, sources said, is pleased that the agency has now realized how disruptive it would have been for many to relocate back to their home offices in January – including potentially having to pull children out of school mid-year. But staff contend that the push to limit virtual work is a solution in search of a problem. Since the pandemic hit in March 2020, the employees have demonstrated they can do their jobs just as well remotely, the sources added…(Monday)
Keep up on the news with our daily version. You’ll love it: