A federal judge on Thursday rejected a motion from an office within the U.S. Treasury Department to dismiss a lawsuit from the New York State Department of Financial Services seeking to prevent the federal government from issuing certain bank charters to financial technology companies.
The state agency, which regulates financial institutions in New York, is suing the Office of the Comptroller of the Currency over a decision to essentially label fintech companies as banks, saying it will diminish its power to regulate the activities of those entities.
Acting DFS Superintendent Linda Lacewell celebrated the decision in a statement, saying it will give the agency an opportunity to argue why those companies should not be federally chartered as banks since federal regulations on those institutions haven’t been as comprehensive as state actions.
“The court has recognized the expertise of DFS and other state banking regulators and the significant role we play in regulating nonbank financial services, promoting innovative fintech products, helping to achieve a level playing field for regulated banking institutions, and most importantly, protecting consumers,” Lacewell said. “DFS, which was created in response to the financial crisis, will continue to lead and fill any and all voids that misguided federal policy decisions create.”
It’s the second time DFS has sued the OCC over its decision to allow fintech companies that do not receive deposits to seek special-purpose national bank charters. The first lawsuit was thrown out last year after a judge said it wasn’t ripe for review. The OCC had not started accepting applications from fintech companies for those charters at the time.
Now, U.S. District Judge Victor Marrero of the Southern District of New York wrote Thursday that the agency’s challenge to the OCC decision is ready for review since the office announced it would start accepting those applications last July.
“As a result of the Fintech Charter Decision, New York State’s regulations for over ‘600 non-bank financial services firms’ are all at risk of becoming null and void,” Marrero said.
The issue of the case is over how financial institutions are regulated between the federal government and the states. Entities chartered by a state are generally also subject to federal regulations. But those chartered by the federal government are largely supervised by the OCC alone, meaning that regulations promulgated by a state agency, like DFS, may not apply.