California’s top financial cop wants to create a program for fintech companies to work with regulators on innovative products and services. Just don’t call it a sandbox.
The state’s plan to create an Office of Innovation in San Francisco, the West Coast’s hub for both fintech startups and blue-chip financial companies, won’t result in cozy treatment on licensing requirements or consumer protection, California Department of Business Oversight Commissioner Manuel Alvarez told Bloomberg Law.
Regulators in Sacramento will still be calling the shots, while the new San Francisco office is intended “to help us keep our finger on the pulse of what’s happening in financial services and innovation,” Alvarez said in a Jan. 24 interview.
The San Francisco unit wouldn’t have independent rule-writing or supervisory functions, Alvarez said, and it also wouldn’t be a so-called sandbox program that allows startups to test new products and services on consumers without first having to obtain a state license. Arizona, Utah and Wyoming have recently adopted fintech sandbox initiatives and a handful of other states are considering them.
While not a sandbox, the California innovation unit would have an influential role in helping the DBO shape its policies, and would reach out to consumer advocates as well as industry players, Alvarez said.
The proposed San Francisco office is just one component of a proposed overhaul by Gov. Gavin Newsom’s (D) to transform the DBO into the Department of Financial Protection and Innovation, modeled on the original vision for the Consumer Financial Protection Bureau. The proposal includes a broad expansion of the companies the agency would supervise and calls for granting it new enforcement authorities to scrutinize market conduct and consumer harm.
The new agency name, with its focus on both consumer protection as well as innovation, has raised questions among consumer advocates about how the two elements will function together and whether the innovation unit might result in a watering down of consumer protection laws.
Not all consumer advocates are as skeptical. “This new department seems designed to foster both the robust consumer protection and inspiring innovation that have come to define the state,” said Ted Mermin, director for the Center for Consumer Law and Economic Justice at the University of California Berkeley School of Law.
“I think that industry might indeed do well to have a well-informed regulator and a well-informed enforcement authority,” Mermin said.
Giving fresh guidance to cryptocurrency companies about state regulation is one area where the innovation unit would take a lead, Alvarez said.
The agency is planning to look to its existing authorities before contemplating a new licensing structure unique to the virtual currency industry, such as with New York’s “Bitlicense” regime, he said.
The innovation group would also create a “glide path” for mature fintech companies to form industrial banks in California, he said. Industrial banks are depository institutions that may be owned by non-bank companies, but only a few states offer charters.
California consumer advocacy groups have voiced concern about San Francisco-based fintech lender Square’s plan to get an industrial bank charter in Utah. If the bank is based in Salt Lake City, it’s proposed community investment dollars would go to that area rather than California.
An overhaul of California’s industrial bank licensing laws could encourage homegrown companies in California rather than pursue bank charters in other states, Alvarez said.
California financial regulators also want to ramp up hiring if Newsom’s plan is approved by the state legislature later this year.
The proposal to add 90 new staff to positions over the next three years to the agency’s current workforce of 660 authorized positions could be a challenge. The DBO has also faced a persistent vacancy rate of 8% to 13% of its workforce, primarily in examination and agency support roles, during the past five fiscal years. The agency aims to bring the vacancy rate to below 8%, Alvarez said.
Alvarez said he believes the vision of the proposed new agency will draw in new talent. “This is not unlike the phenomena we saw in the early days of the CFPB,” which saw a groundswell of applicants interested in the new agency’s mission, Alvarez said.
“This proposal has obviously energized a good number of folks and I don’t see that kind of buzz fading anytime soon,” he said.