KT Fintech Blog

The KT Fintech Blog provides insights into how the emergence of fintech is fundamentally changing virtually every aspect of the financial services landscape and how traditional businesses navigate this rapidly evolving industry.

Archive for November 2017

Posted on Thursday, November 30 2017 at 12:00 pm by -

Federal Reserve Vice Chairman for Supervision Speaks About “Prudent Innovation in the Payment System”

Written by Eamonn K. Moran

Earlier today, Federal Reserve Board Vice Chairman for Supervision Randal Quarles delivered remarks at the 2017 Financial Stability and Fintech Conference sponsored by the Federal Reserve Bank of Cleveland, the Office of Financial Research, and the University of Maryland’s Robert H. Smith School of Business, Washington, D.C. His remarks focused on financial stability and fintech, along with financial innovation.

Quarles observed how new technologies have raised productivity and living standards and contributed to economic growth, along with bringing new conveniences to our lives. He noted that, “[n]ot surprisingly, both the banking industry and technology firms have also been seeking innovations in financial services that mirror and complement changes that have been made in other industries.” Such financial innovation includes changes to consumer lending, financial advice, and retail payments.

He noted that in his new role as vice chairman for supervision at the Federal Reserve, he views innovation “as something that can and should be fostered, but of course [he] must also scrutinize these innovations from a different perspective. That is to say, it is appropriate not only to evaluate the potential of innovations to improve on existing services, but also to judge their ramifications for the safety and soundness of the institutions we supervise and for financial stability.”

Quarles concentrated his remarks on the U.S. payment system, including the “necessary trust and confidence that the system requires, the tension between the need for financial stability and the need to innovate, and the challenges that digital currencies, in particular, present relative to the current system.” In his view, these considerations “highlight the need for a prudent approach to innovation in payment systems.” With respect to payment system innovation, he commented that “we should recognize that there can be a tension between the need for financial stability in the overall payment system and the need to innovate to keep up with the demands of modern technology and lifestyles,” but that this tension is “not necessarily troubling” since innovation does involve some amount of risk. He believes that this tension can be addressed by “balancing the benefits of innovation with the safe and reliable operation of systems and critical activities.” Noting that payment systems present unique challenges to managing the potential tension between financial innovation and stability, Quarles commented that the “essential problem is how to achieve scale and manage financial and technical risk at the same time,” which means that innovation in payment systems can take longer than in other industries.

Regarding private digital currencies, Quarles believes that the financial industry is increasingly recognizing the need to separate the concept of digital currencies from the new technologies – such as distributed ledgers – that the have been employed to transfer assets. He noted that the industry is taking a cautious approach to using new technologies in “limited production settings,” which “appears to reflect the weight of responsibility the financial industry bears for protecting both their customers and their reputations.” Because the “currency” or asset at the core of some digital currency systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in lending cases, is not the liability of any institution, he observed that the treatment and classification of this asset is complicated, especially as it relates to financial stability issues if more wide-scale usage occurs.

Quarles believes that the consideration of a central-bank-issued digital currency to the general public “would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy,” among other issues. That said, he is supportive of continued research into digital currency issues, including highly liquid and secure limited-purpose digital currencies for use as a settlement asset for wholesale payment systems.

In his view, the alternative to privately issued digital currency in the United States is not necessarily a publicly issued digital currency. Rather, Quarles views the near-term alternative as building on the “trusted foundations of the existing payment system” and working to “improve private-sector payment services.” The focus of this appears to be enhancing and improving the banking system’s services. He noted that what the United States currently lacks is “the sort of ubiquitous, real-time payment system that would allow banks and their customers to make transfers and settlements of funds across the banking system instantly, conveniently, and securely all the time.” In closing, Quarles is optimistic that there is potential for a number of these desirable innovations to be offered using a variety of existing and new technologies without posing financial stability risk.

Posted on Tuesday, November 28 2017 at 4:00 pm by -

Court Rules in Favor of Trump Appointee for CFPB Acting Director Slot

Written by Eamonn Moran

As we reported on earlier today, Consumer Financial Protection Bureau (CFPB) Deputy Director Leandra English filed a lawsuit late Sunday evening in the U.S. District Court for the District of Columbia (District Court) seeking to halt President Trump’s appointment of Mick Mulvaney, who was also named in the lawsuit, as CFPB acting director upon Richard Cordray’s resignation last Friday. The lawsuit requested a declaratory judgment and a temporary restraining order to block Mulvaney from taking over the agency.

Late this afternoon, Judge Timothy Kelly of the District Court denied a temporary restraining order to halt Mulvaney from serving as acting director, while acknowledging that the case raises important constitutional issues. Judge Kelly’s decision was based in large part on his conclusion that there was not a substantial likelihood that the case would succeed on its merits.

This ruling cannot be challenged, but according to press reports, Deepak Gupta, English’s lawyer, told reporters that he would have to consult with his client about the next steps, which could either entail seeking a preliminary injunction or requesting a ruling on a permanent injunction, either of which could be appealed to a higher court.

We will continue to provide updates as additional developments occur!

Posted on , November 28 2017 at 9:00 am by -

Showdown Over CFPB Leadership Continues

Written by Eamonn Moran

In an interesting turn of events over Thanksgiving weekend, outgoing Consumer Financial Protection Bureau (CFPB) Director Richard Cordray promoted CFPB Chief of Staff Leandra English to the position of CFPB deputy director on November 24, 2017. This move was intended to allow Ms. English to take advantage of a provision of the Dodd-Frank Act that allows the deputy director of the CFPB to “serve as acting Director in the absence or unavailability of the Director.” The deputy director is appointed by the director, and does not need Senate confirmation. Later on Friday, President Trump announced that he is designating Office of Management and Budget (OMB) Director Mick Mulvaney as acting director of the CFPB, a position he would serve in until a permanent director is nominated and confirmed.

Late Sunday evening, Deputy Director English filed a lawsuit in the U.S. District Court for the District of Columbia seeking to halt President Trump’s appointment of Mulvaney, who is also named in the lawsuit. The Justice Department was expecting to file an order last night responding to the lawsuit. Judge Timothy Kelly, a Trump-appointed judge who was confirmed by the Senate in September, said he would review the Justice Department’s filing and decide on the next steps in the case after that.

The core legal question is whether the President has the authority under the Federal Vacancies Reform Act (FVRA) to designate Mulvaney as the acting director of the CFPB following the resignation of Cordray as of midnight, Friday, November 24, 2017, even if the deputy director otherwise could act under 12 U.S.C. § 5491 (b)(5) [the Dodd-Frank Act]. Mary McLeod, the CFPB’s General Counsel, issued a written memo to CFPB staff on Saturday confirming her oral advice to the CFPB’s senior leadership team that the answer is “yes.” She advised all CFPB personnel “to act consistently with the understanding that Director Mulvaney is the Acting Director of the CFPB.” Her reasoning was based on statutory language, legislative history, precedent from the Office of Legal Counsel at the Justice Department, and case law, which in her view, “all point to the conclusion that the President may use the Vacancies Reform Act to designate an acting official, even when there is a succession statute under which another official may serve as acting.” As General Counsel for the CFPB, it is McLeod’s legal opinion “that the President possesses the authority to designate an Acting Director for the Bureau under the FVRA, notwithstanding § 5491(b)(5).” The Justice Department’s Office of Legal Counsel supports this position as well, noting that the President “may designate an Acting Director of the CFPB under 5 U.S.C. § 3345 (a)(2) or (3), because both the [Federal] Vacancies Reform Act and the office-specific statute are available to fill a vacancy in that office on an acting basis.”

Mulvaney addressed reporters yesterday afternoon, where he announced a 30-day hiring freeze effective immediately and a 30-day “immediate freeze on any new rules, regulations and guidance.” This could stall, at least temporarily, the CFPB’s debt collection rulemaking, among other projects.

Both Mulvaney and English were present at the CFPB yesterday morning. According to the White House, Mulvaney was given full access to the CFPB director’s office with “full cooperation” from its staff. However, both English and Mulvaney issued dueling emails to staff yesterday morning, and both emails were signed “acting director.” Mulvaney’s email asked CFPB staff to disregard English’s instructions and to inform the CFPB’s general counsel of any communications from her related to Bureau duties. A protest is planned at the CFPB today, and Senator Elizabeth Warren (D-MA) is expected to make remarks. In what appears to be somewhat of an internal resolution, the CFPB’s website currently has Mulvaney listed as Acting Director.

Stay tuned for further updates as additional developments occur!