Financial Technology:

Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight

GAO-18-254: Published: Mar 22, 2018. Publicly Released: Mar 22, 2018.

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Lawrance L. Evans, Jr
(202) 512-8678
Evansl@gao.gov

 

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What GAO Found

Fintech products—including payments, lending, wealth management, and others—generally provide benefits to consumers, such as convenience and lower costs. For example, fintech robo-advisers offer low cost investment advice provided solely by algorithms instead of humans. Fintech products pose similar risks as traditional products, but their risks may not always be sufficiently addressed by existing laws and regulations. Also, regulators and others noted that fintech activities create data security and privacy concerns and could potentially impact overall financial stability as fintech grows. The extent to which fintech firms are subject to federal oversight of their compliance with applicable laws varies. Securities regulators can oversee fintech investment advisers in the same ways as traditional investment advisers. Federal regulators may review some activities of fintech lenders or payment firms as part of overseeing risks arising from these firms' partnerships with banks or credit unions. In other cases, state regulators primarily oversee fintech firms, but federal regulators could take enforcement actions. Regulators have published consumer complaints against fintech firms, but indications of widespread consumer harm appear limited. The U.S. regulatory structure poses challenges to fintech firms. With numerous regulators, fintech firms noted that identifying the applicable laws and how their activities will be regulated can be difficult. Although regulators have issued some guidance, fintech payment and lending firms say complying with fragmented state requirements is costly and time-consuming. Regulators are collaborating in various ways, including engaging in discussions on financial protections for customers that may experience harm when their accounts are aggregated by a fintech firm and unauthorized transactions occur. Market participants disagree over reimbursement for such consumers, and key regulators are reluctant to act prematurely. Given their mandated consumer protection missions, regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services. GAO has identified leading practices for interagency collaboration, including defining agency roles and responsibilities and defining outcomes. Implementing these practices could increase the effectiveness of regulators' efforts to help resolve this conflict.

Regulators abroad have taken various approaches to encourage fintech innovation. These include establishing innovation offices to help fintech firms understand applicable regulations and foster regulatory interactions. Some use “regulatory sandboxes” that allow fintech firms to offer products on a limited scale and provide valuable knowledge about products and risks to both firms and regulators. Regulators abroad also established various mechanisms to coordinate with other agencies on financial innovation. While some U.S. regulators have taken similar steps, others have not due to concerns of favoring certain competitors or perceived lack of authority. While these constraints may limit regulators' ability to take such steps, considering these approaches could result in better interactions between U.S. regulators and fintech firms and help regulators increase their understanding of fintech products. This would be consistent with GAO's framework calling for regulatory systems to be flexible and forward looking to help regulators adapt to market innovations.

Why GAO Did This Study

Advances in technology and the widespread use of the Internet and mobile communication devices have helped fuel the rise of traditional financial services provided by non-traditional technology-enabled providers, often referred to as fintech.

GAO was asked to provide information on various aspects of fintech activities. This report addresses fintech payment, lending, wealth management, and other products. GAO assesses 1) fintech benefits, risks, and protections for users; 2) regulatory oversight of fintech firms; 3) regulatory challenges for fintech firms; and 4) the steps taken by domestic and other countries' regulators to encourage financial innovation within their countries. GAO reviewed available data, literature, and agency documents; analyzed relevant laws and regulations; and conducted interviews with over 120 federal and state regulators, market participants, and observers, and regulators in 4 countries with active fintech sectors and varying regulatory approaches.

What GAO Recommends

GAO is making numerous recommendations related to improving interagency coordination on fintech, addressing competing concerns on financial account aggregation, and evaluating whether it would be feasible and beneficial to adopt regulatory approaches similar to those undertaken by regulators in jurisdictions outside of the United States. In written comments on a draft of this report, the agencies stated that they concurred with GAO's recommendations and would take responsive steps.

For more information, contact Lawrance L. Evans, Jr. at (202) 512-8678 or Evansl@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chair of the Board of Governors of the Federal Reserve System should invite the National Credit Union Administration to participate in the Interagency Fintech Discussion Forum. (Recommendation 1)

    Agency Affected: Federal Reserve System: Board of Governors

  2. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Federal Communications Commission (FCC) should discuss with the Presidents of the Federal Reserve Banks of Atlanta and Boston whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 2)

    Agency Affected: Federal Communications Commission

  3. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The President of the Federal Reserve Bank of Atlanta should discuss with the Chairman of the FCC and the President of the Federal Reserve Banks of Boston whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 3)

    Agency Affected: Federal Reserve System: Federal Reserve Bank, Atlanta, GA

  4. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The President of the Federal Reserve Bank of Boston should discuss with the Chairman of the FCC and the President of the Federal Reserve Banks of Atlanta whether the topics of the 2018-2019 biennial regulators meeting of the Federal Reserve's Mobile Payments Industry Working Group would make FCC participation beneficial to the FCC or the group, and take steps accordingly. (Recommendation 4)

    Agency Affected: Federal Reserve System: Federal Reserve Bank, Boston, MA

  5. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of the Consumer Financial Protection Bureau should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 5)

    Agency Affected: Consumer Financial Protection Bureau

  6. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chair of the Board of Governors of the Federal Reserve System should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 6)

    Agency Affected: Federal Reserve System: Board of Governors

  7. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Federal Deposit Insurance Corporation should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 7)

    Agency Affected: Federal Deposit Insurance Corporation

  8. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the National Credit Union Administration should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 8)

    Agency Affected: National Credit Union Administration

  9. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Comptroller of the Currency should engage in collaborative discussions with other relevant financial regulators in a group that includes all relevant stakeholders and has defined agency roles and outcomes to address issues related to consumers' use of account aggregation services. (Recommendation 9)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  10. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Federal Deposit Insurance Corporation should formally evaluate the feasibility and benefit of establishing an office of innovation or clear contact point, including at least a website with a dedicated email address. (Recommendation 10)

    Agency Affected: Federal Deposit Insurance Corporation

  11. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the National Credit Union Administration should formally evaluate the feasibility and benefit of establishing an office of innovation or clear contact point, including at least a website with a dedicated email address. (Recommendation 11)

    Agency Affected: National Credit Union Administration

  12. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chair of the Board of Governors of the Federal Reserve System should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 12)

    Agency Affected: Federal Reserve System: Board of Governors

  13. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 13)

    Agency Affected: Commodity Futures Trading Commission

  14. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Federal Deposit Insurance Corporation should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 14)

    Agency Affected: Federal Deposit Insurance Corporation

  15. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the National Credit Union Administration should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 15)

    Agency Affected: National Credit Union Administration

  16. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Securities and Exchange Commission should formally evaluate the feasibility and benefits to their regulatory capacities of adopting certain knowledge-building initiatives related to financial innovation. (Recommendation 16)

    Agency Affected: United States Securities and Exchange Commission

 

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