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Op-Ed | American Prospect | September 7, 2021

A Fintech Fox In The Regulatory Henhouse

Ethics in GovernmentFinancial RegulationRevolving Door
A Fintech Fox In The Regulatory Henhouse

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One of newly installed New York Gov. Kathy Hochul’s first key decisions was naming Adrienne Harris as the head of the state’s Department of Financial Services (DFS), which is responsible for regulating the activities of nearly 1,800 insurance companies with cumulative assets of $5.5 trillion and more than 1,400 banking and financial institutions with assets over $2.9 trillion.

If confirmed, Harris would be responsible for ensuring prudent financial conduct, robust consumer protection, and anti-fraud measures within New York. But given its role as the nation’s—and the world’s—financial center, her actions will have a significant impact on regulation and enforcement across the country and around the world.

The problem is Harris’s own philosophy of regulation. Apparently, Harris just doesn’t get why regulators have to be so skeptical of the industry all the time—which makes sense, coming from a fintech executive who’s advocated for the industry on both sides of the revolving door.

DFS hasn’t always had this philosophy. Benjamin Lawsky (the first DFS superintendent) beefed up the department’s criminal division and built an agency of 1,400 employees, armed with New York’s powerful financial laws like the Martin Act. Lawsky threatened to revoke Standard Chartered Bank’s New York banking license after a federal investigation uncovered money laundering. This state-level scrutiny in turn pushedfederal regulators to dole out harsher penalties, such as the record $1.9 billion fine against HSBC for similar violations. When led by committed fighters, DFS can be a major boon in the fight against financialization.

Contrast Lawsky’s record with Harris’s own vision of what financial regulation should look like. “The way we tend to regulate financial services, and most industries in the United States, is—and I always took a little bit of an issue with this—it’s sort of like the list of no-no’s,” Harris said last year in an interview with the University of Michigan’s Ross School of Business. “It’s like ‘Go forth, free market, but here are the list of no-no’s,’ and then when somebody finds a new no-no you’re like ‘OK, we’ll add that to the list of no-no’s.’ Instead of what I always thought was a better approach, which is ‘What’s the outcome you’re looking to drive?’ Is it financial inclusion? Financial health? Consumer protection? Whatever it is. And how do you work toward the affirmative outcome that you want?”

This seems to especially irk Harris when it comes to fintech. “We’re so used to thinking about financial services in the predatory sense. Then they [regulators] come to fintech and then they’re like ‘Okay, where’s the hidden fee? Where’s the icky thing?’ Instead of approaching it, again, with this affirmative mindset,” Harris said.

On the face of it, it’s obviously important for regulators to know the underlying purpose of their framework. But a lot of people would say that regulators establishing “no-no’s” and looking for “hidden fees” or “icky things” means they’re doing their job, which isn’t to take industry actors at their word. Regulators instead are supposed to think first of the public that could be harmed if industry is not being forthright—which, of course, it rarely is.

The “no-no’s” are there first and foremost because there isn’t really any other way to force compliance on a regulated entity without articulating what they can and cannot do. In addition, many forms of “financial innovation” are really new ways to exploit the public, either through hidden usurious interest rates or new ways of permitting gambling with other people’s money. The “no-no’s” are there to prevent financial exploitation, which is a need that only government can fulfill.

Case in point: fintech firms, including some that Harris herself cited. She told the Ross School that “frankly, I’m not sure I understand why” so-called payday advance apps like Brigit and Earnin are controversial, since they “are helping people get access to their earned, but not yet paid, wages,” as an alternative to payday loans. Except Earnin was subpoenaed by DFS—the same agency Harris may soon lead—for its “tipping” policy, in which users who don’t leave a tip for the company have their Earnin withdrawals capped at $100. This may not be a payday loan interest rate, but to a low-wage worker who can’t get more than $100 unless they ante up, it’s a distinction without a difference. For its part, Brigit makes money through a $9.99-per-month subscription fee and caps loans at $250. Unless a user is very regularly in danger of overdrafting, it may not be worth the $120-per-year cost.

Notably, Harris was an adviser to Brigit at the time she made those remarks, and was a limited-partner adviser to one of its venture capital backers, NYCA Partners. During the Trump years, Harris also partnered up with Homie, a firm that buys and sells houses in lightly regulated Utah; States Title, a machine-learning product for real estate agents; Carver Edison, which makes products for buying and selling stocks; and BOND.AI, which claims to have created an “empathy engine” for marketing financial products to consumers. She also joined the Brunswick Group, a D.C.-based lobbying and public relations firm, this March. Companies looking for her advice to help “future-proof” their operations through her “regulatory intelligence” and “political expertise” can also request a direct consultation on her website.

Harris likely got most of those jobs thanks to her role as the Obama administration’s policy head on fintech. Her work culminated in a white paper titled “A Framework for Fintech,” which is less of a framework and more of an ode to public-private collaboration. The word “innovation” appears 51 times.

The paper’s section on potential systemic risks from fintech is one paragraph long, in which Harris gestures toward regulators collaborating on oversight while assuring readers that “fintech represents only a small part of the wider financial services sector at present.” To prevent algorithmic bias, Harris writes that the government should merely “partner with the private sector” and “evaluate innovations that have the potential to mitigate bias,” but not actually regulate or ban any harmful practices.

All of this matters, since Harris is now inheriting several regulatory regimes that run counter to her own stated beliefs about the purpose of regulation.

During his tenure as DFS superintendent, Lawsky developed one of the earliest virtual currency regulatory frameworks—New York’s BitLicense. BitLicense’s requirements touch on consumer protection, anti–money laundering and fraud, cybersecurity, capital requirements, and audit requirements. The muscular licensing regime has been widely panned by various crypto firms, and only 25 companies have received licenses since its introduction in 2015.

Linda Lacewell, one of Lawsky’s successors, moved to loosen some of the licensing requirements in a bid to encourage more crypto firms to operate in the state. Nevertheless, Lacewell’s DFS challenged the national bank regulator under Trump’s “authority to grant SPNB charters to nondepository fintech companies.” That case has been mooted, but that it was brought so recently underscores the stakes for fintech with having a friend or skeptic running DFS.

As Harris potentially enters office after extensive work with fintech startups, the key question is how her enthusiasm for the space may influence her development and enforcement of regulations.

Early reactions to her appointment show that industry players are excited to see a like-minded person take up the regulatory mantle. “No one knows the future of financial services better than Adrienne and her hiring is a real competitive advantage for NY,” wrote Matt Homer, Harris’s former colleague at NYCA Partners who runs their crypto strategy. Trump-era fintech regulator Daniel Gorfine called Harris “an excellent choice,” and Obama-era Treasury appointee Alex Zerden agreed it was a “smart choice.” Both Gorfine and Zerden now run “consultancies” (read: shadow lobbying shops) for fintech and crypto firms. It seems Harris is truly a bipartisan nominee; revolving-door profiteers on both the Democratic and Republican teams endorse her.

They may have, in Harris’s words, an “affirmative mindset,” but that shouldn’t be shared by hardworking New Yorkers hoping not to get ripped off. And less optimistic still are the implications for the rest of the world, as the global hub of the financial industry lifts up one of fintech’s darlings.

Ethics in GovernmentFinancial RegulationRevolving Door

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