Rant: What the CFPB can learn from the SEC
Re-thinking regulation as it relates to standardization. Say that 5 times fast.
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Hi there,
You’ve heard the 1033 recaps, but now it’s time for the rant. Ready to dive in?
For those who may need a quick refresher…
As of October 2023, the CFPB formally announced that moving forward, banks must offer free and robust API access, giving consumers control over their financial data.
It’s easy to understand where the CFPB is coming from. Everyone deserves free access to their data… And the banks are evil right?
The Politics of it All
I do however find FinTech’s RegTech politics fascinating. What a world we live in that regulators are showing up in Vegas to give TedX-style talks. A world in which the CFPB is dictating SaaS pricing strategy.
My gripe with 1033 isn’t just that it’s not going far enough by only covering depository accounts – which in itself it’s wildly insufficient in addressing the full spectrum of financial products and services that impact consumers.
It’s also not that they’re suggesting an expensive SLA or even that they’re talking out of school delving into pricing strategy and mandating banks can’t charge for access.
(There’s no free lunch, and consumers will pay one way or another. This is the equivalent of regulators forcing banks to bundle and can be the opposite of transparent pricing.)
It’s that the one thing that will drive costs down for consumers AND the banks, but has yet to be presented, is a standard API.
“But Jon, there’s FDX.”
So here we are, FDX doesn’t advocate for specific policy proposals, and the CFPB doesn’t advocate for standards. If you build it they won’t come.
Talk about unpopular opinions - suggesting that a call for standardization comes out of Washington?! In fact, I asked some of the brightest minds in FinTech their thoughts on the stance, and they vomited at the notion of a technical spec written by regulators.
We’re talking about folks whose technical acumen falls just short of the ability to update the time on a microwave.
So, tail between my legs, I went back to previous regulatory “taxes” the industry has paid to look for a precedent.
Raising The Standard
The 2002 Sarbanes Oxley Act (SOX) is a federal law that aims to increase the reliability of financial reporting, and protect investors from corporate fraud. Created in response to some major corporate scandals that shook investor confidence (hello, Enron), SOX was designed to improve accountability, internal controls, independent audits, and whistleblower protection.
And since implementation, the SEC and PCAOB have issued regulations, standards, and guidance to instill these new precedents, moving forward.
For instance, both SEC's regulations and PCAOB’s Auditing Standards state that…
“Management is required to base its assessment of the effectiveness of the company’s internal control over financial reporting on a suitable, recognized control framework established by a body of experts that followed due process procedures, including the broad distribution of the framework for public comment.”
Layman translation: You must make a reasonable effort to adopt an industry standard.
In 2005, the electronic trading world was turned upside down by Regulation NMS - h/t to Empire Startups alum Brad Katsuyama.
Put simply, this rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution of trades at prices that are inferior to protected quotations displayed by other trading centers.
Those who lived through REG NMS got a bit of a chuckle when the FinTech world learned that Robinhood was a terrible actor. Absolute prop trading wolf in occupy wall street sheep’s clothing.
Nonetheless, the ruling established a standard, modern regulatory framework for trading securities in the U.S.
So, what can the CFPB learn from the SEC?
It’s tough to disagree with the FinTech jedis who wouldn’t trust a regulator to API their way out of a paper bag. But on multiple occasions, the SEC has taken stronger measures to protect consumers with more than a few “mic drop” moments at Money2020.
Simply opine-ing that, “Fair standards developed by the market to leverage our rule will be critical to the creation and maintenance of an open banking system,” isn’t enough.
Let’s make one thing clear: I’m not asking the CFPB to publish a SDK.
They could, however, stipulate that banks publish a policy on API standardization including a recognized control framework established by a body of experts.
Ala, SOX.
Further they could suggest banks establish, maintain, and enforce written policies and procedures that ensure the adoption of common industry standards.
Ala, REG NMS.
The opportunity is to draft a framework that does not dictate an exact solution, but still instills standardization, while at the same time, letting the industry, the experts, the operators, define the specs.
But, enough RegTech history for today. You can catch the pros hashing out the CFPB’s latest political aspirations this April during NY FinTech Week, April 8-12.
Cheers,
Jon
P.S. - Love nerding out on 1033? Chime in if you’d like us to continue our open banking coverage in a future post….
What carrot could be dangled for banks to get behind a standard without Rohit’s stick?
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