What progress has the Conference of State Bank Supervisors (CSBS) made in implementing the 2019 recommendations of the Fintech Industry Advisory Panel (the “Advisory Panel”) related to Vision 2020, its bold approach to modernizing and streamlining the state licensing and supervision of fintech companies?
A new report completed by the Advisory Panel, a group formed to consider the laws and make recommendations to the state regulators, was recently released. The 2020 report gave an update on the efforts of the state regulators to implement the Advisory Panel’s 2019 suggestions that were supported by the regulators. These included initiatives such as expanding the use of the Nationwide Multistate Licensing System (NMLS) for licensing, increasing coordination of the states in examinations, and standardizing statutory definitions.
What happened
According to the CSBS, the United States is “in the midst of enormous growth” in nonbank financial services companies that utilize fintech business models, with money services business (MSB) a $1.4 trillion sector where CSBS data shows that approximately 55% of all transactions are fintech-based.
Whether engaged in money transmission or lending, these companies are licensed and supervised at the state level, and technology has enabled them to scale geographically and enter new markets quickly. According to the CSBS, this has caused a need to focus on the “pain points” created by the numerous variations in the law among the states.
Based on this identified need to re-engineer nonbank supervision andtransform multistate regulation, CSBS launched Vision 2020, which contained several initiatives aimed at working toward a more harmonized system of nonbank licensing and supervision.
One of the findings in the 2020 Accountability Report of the Advisory Panel relates to the progress made in expanding the use of the NMLS as a conduit for licensing and supervision of companies involved in many nonbank financial services.
As of November 1, 2019, 26 states signed on to a multistate MSB licensing agreement, a process designed to streamline the money transmitter licensing process. Under the new process, when the initial state performs its review, the other participating states agree to accept the findings of the initial state relating to the various components of the license application and process.
Another part of the report examines progress in multi-state examination coordination, another recommendation of the Advisory Panel. Based on that recommendation, the states piloted a “One Company, One Exam” concept that enabled a multi-state MSB to be examined once in 2019, by having that examination incorporate, and meet, the requirements of the other states. The participating states are processing the lessons learned from the pilot, and exploring next steps.
“The key preliminary takeaway: the states can do this,” the Advisory Panel wrote. “An intentional and coordinated approach to scheduling and information sharing … leads to reduced regulatory burden, a more efficient use of regulatory resources and a more networked system of state MSB supervision.”
Following another recommendation of the Advisory Panel, several initiatives are under way to increase transparency, including the CSBS’s creation of a central repository of licensing- and fintech-related state guidance. Last August, it launched the State Regulatory Guidance Portal, with the release of a 50-state survey of state consumer finance laws expected in early 2020. Efforts to coordinate information sessions for regulators and industry to discuss fintech developments are also underway.
Based on the Advisory Panel’s recommendation to standardize statutory definitions, interpretations, exemptions and procedures, the states formed a committee to develop a proposed 50-state model MSB law, a draft of which was published in October 2019. The model law would standardize definitions and interpretations of the activities that require money transmitter licensing as well as exemptions and procedure(s) for exemptions to such licensing.
Why it matters
While the state regulators indicated support for many of the recommendations of the Advisory Panel, some, such as ensuring greater consistency in certain statutory requirements, were not endorsed and will need to be considered in the future. Nevertheless, progress has been made in the past year in developing systems, procedures, and coordination agreements, in furtherance of the many recommendations of the Advisory Panel that were supported by the state regulators. The CSBS and the state regulators envision this expanded and coordinated state cooperation as a means to more effectively regulate nonbank providers of financial products and services, and to make the case for state, rather than federal, supervision.