Tone at the top: Priorities from the Acting Comptroller of the Currency

Key insights:

• • • Accelerating bank-fintech partnerships — Acting Comptroller Hood emphasized the importance of innovation in the financial sector, advocating for more freedom for fintech companies and encouraging banks to engage responsibly with digital assets.

    • Advancing financial inclusion — Hood said he passionately supports initiatives aimed at increasing capital access for underserved communities and promoting economic participation, highlighting financial inclusion as a critical civil rights issue.

    • Modernizing regulation to stimulate growth — The Acting Comptroller stresses the need for individualized, risk-based supervision and reducing regulatory burdens to unleash growth in the financial sector.

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In February, Rodney E. Hood, former chair of the National Credit Union Administration Board, became the first African American to be name Acting Comptroller of the Currency. And although his historic appointment may be temporary — as Jonathan Gould is undergoing hearings for the permanent position — Acting Comptroller Hood is living up to his assertion that, “Acting does not mean inactive.”

At the June U.S. Chamber of Commerce Capital Markets Forum, Acting Comptroller Hood delivered remarks detailing his vision for the regulatory agenda of the Office of the Comptroller of the Currency (OCC), which included these highlights:

Ready all players: Green lights for crypto & fintech

The first two of Acting Comptroller Hood’s cited priorities focused on innovation: first, by allowing fintech firms to operate more freely; and second, by expanding the ability for banks to hold digital and cryptocurrency assets.

He cited his desire to focus on “accelerating bank-fintech partnerships,” adding that “innovation is the currency of progress.” He also encouraged “expanding responsible engagement with digital assets” by participating in “the architecture of a new financial frontier.”

These priorities represent a full turn towards the modernization of the financial system, as it seems that the government now is recognizing that these technologies are not going away. Renewing and updating the regulations surrounding these issues is better than trying to put “new wine in old wineskins.” Simply put, when new things emerge, we need to create new ways to govern them.

Further, Hood also indicated his passionate support for initiatives designed for financial inclusion, capital access for underserved communities, and fuller economic participation. “Financial inclusion is the civil rights issue of our time,” Hood said, adding that viewing fintech companies as a way to help underserved people access banking services is critical.

In the speech, Hood mentioned modernizing regulations as his last major initiative, perhaps for impact. He hailed regulatory rightsizing as one of the OCC’s most consequential priorities, noting that each financial institution requires individualized, risk-based supervision, not a one-size-fits-all approach. (Interestingly, on the OCC website under the Comptroller’s Areas of Focus, however, reducing regulatory burden is listed first, indicating its true place in the priority matrix.

Modernizing regulation to unleash growth

Overall, each of Hood’s main points send us the same direction — toward modernization of the US financial system via new technologies and markets, and by opening up more ways for financial institutions to move money.

While nothing here points to reducing requirements around anti-financial crime regimes, the effect of this loosening of the spigot likely will introduce new and divergent risks into many financial institutions. The logic behind this is simple: more products, more ways to move money, and more customers is a formula that adds to proportionate increases in risk. Illicit actors are sure to be standing ready to take advantage of the situation.

Indeed, smart financial services companies will keep anti-financial crime efforts front-and-center, empowering their traditional lines of defense to ensure that business growth is from legitimate customers operating legal enterprises. One area that will affect financial crimes departments is the removal of regulators’ focus on reputational risk. This typically refers to customers or businesses that are legal but may be considered unsavory, such as firearms or adult entertainment.

Economics and opinions aside, financial crimes teams are overwhelmed and the winds are blowing more work in their direction. Monitoring legitimate businesses by applying the same kind of due diligence standards meant to stem the flow of criminal money creates more noise. Although it is possible to collate funds from illicit activity into a business that already walks close to the line of legality, being classified as high-risk is hardly a good way to evade scrutiny. These businesses will remain high-risk for reasons unrelated to reputational risk, and financial crimes teams will still review them for unusual behavior rather than because of a moral judgement.

Hood also discussed reassessing capital requirements so that such standards are not excessive. This — while it could contribute to shaky institutions that grow artificially large and risk collapse — could also just be a great way to stimulate investment in the sector. The proof will be evident over the next couple of years.

Combining all these elements that Hood outlined draws an interesting picture. Fintechs are going to be empowered to onboard new customers, especially because so many people are underbanked. At the same time, banks will be required to keep less capital on hand and will be free to lend out more to a broader definition of qualified borrowers. Speculative digital assets and cryptocurrencies will now be on the balance sheets of these same banks with fewer capital requirements.

Assessing each bank with a tailor-made, risk-based approach is wonderful in theory but in reality, it requires time, effort, and expertise. A flood of innovation and capital may continuously stimulate the economy and become the so-called rising tide that lifts all ships; but there are other potential futures that do not look quite as rosy. For example, the financial services sector could find itself drowning in customers, unable to keep up with the many requirements that will inevitably stay in place.

What can the financial industry do in response?

Innovation in the banking sector means the same in the criminal sector, and we must continue to strive for innovation in areas of law enforcement, intelligence, and anti-crime. Institution leaders need to consider acquiring targeted technological tools to make team members more powerful.

AI and automation may take away some entry-level jobs, and people must become adept at leveraging new tools and honing stronger skills to stay competitive. In collaboration with automated systems, people can do more, better. This means institutions’ compliance & risk departments, as always, must continuously train workers to stay at the cutting edge of required skillsets.

Additionally, institutions should find new ways to intelligently target criminal networks instead of just monitoring and reviewing the typical big, unusual, or fast transaction patterns. Behavioral typologies, intelligence analysis of where money is used in supporting illegal activity, and a better understanding of the humans involved, are all available to a department willing to innovate. At this point, banks and other financial services institutions cannot let the criminals out-think the financial industry.

When we hear that an administration hopes to remove regulations and shrink government, we think there will be fewer jobs in compliance. Yet, the opposite is likely true, since these priorities signal a shift to making it easier for financial institutions to do business, exploit digital technologies, and add customers. Naturally, the combination leads to increased volumes in risk, and therefore, the work of risk & compliance professionals remains important and massive.

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