A Fintech fox in the regulatory henhouse
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One of the first key decisions of the new governor of New York, Kathy Hochul, was to appoint Adrienne Harris as the head of the state’s Department of Financial Services (DFS), which is responsible for regulating the activities of nearly 1,800 insurance companies with cumulative assets of $ 5.5 trillion and over 1,400 banking and financial institutions with assets of over $ 2.9 trillion.
If confirmed, Harris would be tasked with ensuring prudent financial conduct, strong consumer protection and anti-fraud measures in New York City. But given its role as the financial center of the country and the world, its actions will have a significant impact on regulation and enforcement across the country and around the world.
The problem is Harris’ own regulatory philosophy. Apparently Harris just doesn’t understand why regulators have to be so skeptical of the industry all the time, which makes sense, coming from a fintech executive who has championed the industry on both sides of the door. rotating.
DFS has not always had this philosophy. Benjamin Lawsky (the first superintendent of the DFS) strengthened the department’s criminal division and built an agency of 1,400 employees, armed with powerful New York financial laws like the Martin law. Lawsky threatens to revoke the banking license of Standard Chartered Bank in New York after a federal investigation uncovered money laundering. This state-level review in turn pushed Federal regulators to impose tougher penalties, such as the record fine of $ 1.9 billion against HSBC for similar violations. When led by committed fighters, DFS can be a major boon in the fight against financialization.
Compare Lawsky’s track record with Harris’s own view of what financial regulation should look like. “The way we tend to regulate financial services, and most industries in the United States, is – and I’ve always had a little problem with that – it’s kind of like the no-no list.” Harris said last year in an interview with the Ross School of Business at the University of Michigan. “It’s like, ‘Go ahead, free market, but here’s the no-no’s list,’ and then when somebody comes up with a new no-no, you’re like ‘OK, we’ll add that to the no’s list. -no .’ Instead of what I always thought was a better approach, which is “What results are you looking to achieve?” »Is it financial inclusion? Financial health? Consumer protection? It doesn’t matter what it is. And how do you work towards the affirmative outcome that you want?
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This seems to irritate Harris in particular when it comes to fintech. “We’re so used to thinking about financial services in a predatory sense. Then they [regulators] come to fintech and then they’re like, “Okay, where are the hidden charges? Where’s the filthy stuff? Instead of approaching it, once again, with this affirmative state of mind ”, Harris said.
At first glance, it is obviously important that regulators know the underlying purpose of their framework. But a lot of people would say that regulators who set ‘no-no’s’ and look for ‘hidden fees’ or ‘disgusting things’ mean they are do their job, which is not to take industry players at their word. Rather, regulators are supposed to think first about the public who could be harmed if the industry is not forthright, which, of course, rarely is.
The “no-no’s” are there first and foremost because there really is no other way to impose compliance on a regulated entity without articulating what it can and cannot do. In addition, many forms of “financial innovation” are genuine new ways of exploiting the public, either through hidden usurious interest rates or through new ways of allowing gambling with other people’s money. The ‘no-no’s’ are there to prevent financial abuse, a need that only government can meet.
Case in point: fintech companies, some of which were cited by Harris herself. She told Ross School that “frankly I’m not sure I understand why” so-called payday advance apps like Brigit and Earnin are controversial because they “help people access their earned wages, but not yet paid, ”as an alternative to payday loans. Except Earnin was subpoenaed by DFS– the same agency Harris may soon be leading – for its “tip” policy, in which users who don’t tip the company have their Earnin withdrawals capped at $ 100. It might not be an interest rate for a payday loan, but for a low-wage worker who can’t get more than $ 100 unless he takes the bar, it’s is a distinction without difference. For her part, Brigit makes money from a subscription fee of $ 9.99 per month and caps loans at $ 250. Unless a user is very regularly in danger of overdrafting, it may not be worth the cost of $ 120 per year.
Apparently Harris just doesn’t understand why regulators have to be so skeptical of the industry all the time.
Notably, Harris was an advisor to Brigit at the time she made the remarks, and was a limited partner to one of her venture capital backers, NYCA Partners. During the Trump years, Harris also partnered with Homie, a company that buys and sells homes in lightly regulated Utah; States Title, a machine learning product for real estate agents; Carver Edison, which makes products for buying and selling stocks; and BOND.AI, which claims to have created an “empathy engine” for marketing financial products to consumers. Her too joins the Brunswick Group, a Washington-based lobbying and public relations firm, in March. Companies that seek his advice to help “sustain” their operations through his “regulatory intelligence” and “policy expertise” may also request a direct consultation on its site.
Harris probably got most of these jobs through his role as the Obama administration’s fintech policy maker. His work resulted in a white paper titled “A framework for fintech», Which is less a framework than an ode to public-private collaboration. The word “innovation” occurs 51 times.
The section of the paper on the potential systemic risks of FinTech includes a paragraph, in which Harris signals regulators to collaborate on oversight while assuring readers that “FinTech is only a small part of the industry right now. broader financial services ”. To avoid algorithmic bias, Harris writes that government should simply “partner with the private sector” and “assess innovations that have the potential to mitigate bias,” but not actually regulate or ban harmful practices.
This is all important, as Harris now inherits several regulatory regimes that run counter to his own beliefs about the purpose of regulation.
During his tenure as DFS Superintendent, Lawsky developed one of the first virtual currency regulatory frameworks, BitLicense of New York. BitLicense conditions address consumer protection, anti-money laundering and fraud, cybersecurity, capital requirements and audit requirements. The muscular licensing regime has been widely criticized by various crypto firms, and only 25 companies have received licenses since its introduction in 2015.
Linda Lacewell, one of Lawsky’s successors, moved relax some of the licensing requirements in an effort to encourage more crypto companies to operate in the state. Nevertheless, Lacewell’s DFS disputed the national banking regulator under Trump’s “authority to grant SPNB charters to non-depository FinTech companies.” This case has been brought up, but the fact that it was brought so recently underscores the stakes for fintech to have a friend or skeptic running DFS.
As Harris potentially takes office after intensive work with fintech startups, the key question is how his enthusiasm for the space can influence his development and enforcement.
Early reactions to his appointment show industry players are excited to see a like-minded person take on the regulatory role. “No one knows the future of financial services better than Adrienne and her hiring is a real competitive advantage for NY” wrote Matt Homer, Harris’ former colleague at NYCA Partners who leads their crypto strategy. Trump-era fintech regulator Daniel Gorfine called Harris “an excellent choice“and Alex Zerden, appointed to the Treasury during Obama’s time, agreed that it was a”smart choice. ” The two Gorfin and Zerden are now leading “consultations” (read: shadow lobby shops) for fintech and crypto firms. It seems Harris is truly a bipartisan candidate; the profiteers of the revolving doors of the Democratic and Republican teams support it.
They may have, in Harris’ words, an “assertive mindset,” but that shouldn’t be shared by hard-working New Yorkers who hope they don’t get ripped off. And the implications for the rest of the world are even less optimistic, as the global financial industry hub grows one of fintech’s darlings.