Changes are on the horizon for financial technology firms, banks, and bank holding companies. These changes stem from the novel supervision program enacted by the Board of Governors of the Federal Reserve System. Under this program, increased scrutiny for any institutions involved with crypto-assets, blockchain technology use, and complex fintech partnerships with nonbanks will be implemented. This is another step in the Federal Reserve’s mission to mitigate potential risks related to the delivery of financial services to customers.
As part of this supervision program, there will be a focus on business practices that, in the past, had been deemed ‘nontraditional’ or ‘novel’. While such practices have often pushed the boundaries of financial service delivery, the Board has expressed its growing concerns. Risks have been identified in multiple areas. From front-end user applications and their algorithms, to the stability of the underlying technology platforms, it’s clear that the Federal Reserve is not taking any risks.
In this regard, firms operating in the financial technology sector are advised to pay close attention to the intricacies of the new supervision program. Banks and bank holding companies with investment and operational interests in these areas are equally urged to do so.
The timing of the Board’s initiative is particularly important. As the financial industry continues to rapidly integrate technology into its services, regulatory bodies are keen to get ahead of the potential risks. Banks, nonbanks, and stakeholders alike need to be aware of this increased scrutiny and what it might mean going forward.
For an in-depth overview of these changes, make sure to review The Federal Reserve’s Novel Activities Supervision Program prepared by Perkins Coie.