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How Regulatory Oversight Can Be Fixed To Protect Consumers And Promote Fintech Innovation

Forbes Legal Council
POST WRITTEN BY
Matthew Digesti

Innovation in financial technology (fintech) brings risk and reward to consumers. As new technologies are brought to market, however, regulators struggle to keep pace by enforcing antiquated regulations, causing pro-consumer technologies to suffocate.

Current regulatory oversight is both costly and opaque. According to the 2014 ICBA Community Bank Lending Survey, community banks routinely report that regulatory costs have reduced the number of loans and mortgages offered to customers. Forty-three percent of the fintech companies attending last year’s FinTech Mashup said that regulatory issues were the single largest impediment to their growth. And more and more, regulations are forcing the banking industry to consolidate.

That being said, financial regulators do play a critical role. Current regulation offers some structure, but fintech innovation is lapping regulation. When issues arise, scrappy, idealistic entrepreneurs collaborate until they reach solutions. Regulators, on the other hand, all too often resort to costly adversarial interactions. My company Bristlecone Holdings is a great example; we are a scrappy startup providing innovative financing options to consumers that are shut out of traditional financing, but regulators have literally declined our requests to sit down and have discussions.

Like many in our industry, we are eager to develop regulator relationships through communication and transparency and unfortunately, we are finding that regulators do not have the same desire. With fintech innovators thirsty for guidance and in search of a true partner in consumer protection and innovation, what can we do to fix the situation?

A New Regulatory Process

Too often, small companies must choose between allocating resources to regulatory investigations or improving customer products and services. They simply cannot afford to do both. A single regulatory investigation can make a small company unattractive to debt or equity. And when that small company is creating pro-consumer technologies, consumers suffer. This has to change.

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Fintech leaders like SoFi and Lending Club provide industry-shifting choices to consumers in a safe and transparent way. These companies were fortunate to grow quickly and accumulate vast resources before regulators came knocking. But what about businesses without millions of dollars budgeted for government investigations?

I believe that better regulation begins with collaboration. When regulators receive complaints, their first reaction is typically to investigate and prepare for potential litigation. The interaction is immediately adversarial and businesses are forced into a bunker mentality.

Good actors, however, want to cooperate. They want to improve processes and systems, and will obsessively focus on the consumer. In turn, good actors are eager to work with regulators to find solutions. So let’s consider a new and more collaborative process:

  • Good-Faith Settlement Discussions: If regulators deem an investigation or litigation necessary, they would first notify the target business. The business then has a choice: engage in good-faith settlement discussions or ignore the request. If the business chooses to engage, the parties would begin a mandatory six-month engagement period to negotiate a settlement. If a settlement cannot be reached or if the business ignores the request to engage, regulators may then pursue investigation or litigation.
  • Safe Harbor: If businesses engage with regulators, they should be rewarded with safe harbor during the engagement period. Any potential violations or fines during the engagement period would be temporarily suspended and waived if a settlement is reached. If a settlement is not reached, the violations or fines would be put back on the table. This way, businesses are incentivized to work seriously toward resolution.
  • Confidential Collaboration: Regulators should also be rewarded for engaging with businesses by getting access to information. Regulators need information to effectively regulate, but businesses hesitate to share information for fear that regulators might use it against them. To solve this informational impasse, we need a solution benefiting both parties. Information requested by regulators and disclosed by businesses during the engagement period would be confidential and inadmissible at trial. If no settlement is reached, the regulators would certify they have destroyed the information and would then have to obtain the same information through traditional investigations and discovery. This approach protects both parties’ interests by incentivizing each to be transparent and reach a resolution.
  • Fees as Incentives: To be effective, the resolution process must have teeth. If the resolution process fails and the dispute moves to trial, either party may request attorney’s fees from the court, regardless of who won. The court would then review the parties’ conduct during the engagement period with the authority to punish bad faith conduct. For example, if the court found that the business failed to turn over key information during the engagement period, the court could award the regulators their fees and/or levy fines. The only way to keep both sides honest is to make them pay, regardless of who wins or loses.

This simple change can incentivize businesses and regulators to work toward finding early resolutions that maximize benefits to consumers. The current environment promotes slow change only the biggest corporations can afford. This hits consumers and small businesses the hardest. We can do better.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.