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Former official seeks to root out fintech’s legal impediments

Reconstruction-era government spending law among obstacles in regulators’ way, Jo Ann Barefoot says

Jo Ann Barefoot, CEO of the Alliance for Innovative Regulation, is photographed on March 6, 2020.
Jo Ann Barefoot, CEO of the Alliance for Innovative Regulation, is photographed on March 6, 2020. (Tom Williams/CQ Roll Call)

A Reconstruction-era law to rein in government spending is among many federal statutes preventing financial regulators from fully studying today’s cutting-edge financial technologies, according to a former Treasury official who wants to do something about it.

Former Senate Banking Committee staff member Jo Ann Barefoot, the first woman to become deputy comptroller of the currency, is now the CEO and co-founder of the nonprofit policy group Alliance for Innovative Regulation.

Barefoot, 70, said she has dedicated the past few years to helping clear the regulatory and legal impediments, starting with an 1870s predecessor to the modern Antideficiency Act among other old laws, that are hindering the development of financial technology and denying consumers the benefits.

To that end, Barefoot last year founded AIR, a Washington-based nonprofit group dedicated to transforming the financial regulatory system. The organization is identifying areas where laws constrain regulators’ ability to promote innovation.

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Frustration for regulators

Along the way, Barefoot has enlisted an array of Beltway insiders.

They include Thomas J. Curry, a former comptroller of the currency during the Obama administration and part of the Trump administration. He said regulators routinely “throw up our hands” in frustration when trying to collect financial information from outside the government because of bureaucratic obstacles.

Chris Larsen, executive chairman at cryptocurrency company Ripple Inc. and another supporter of AIR, said innovators have complained that technology is moving too fast for existing regulation, “creating friction and uncertainty.” 

“Both sides need help to ensure society reaps the benefits of these new innovations,” he told CQ Roll Call in an email. “Jo Ann Barefoot is the most experienced, connected and enthusiastic person I can think of to make that happen.” The company has given AIR grants to advance its mission.

“We have a very ambitious agenda,” Barefoot told CQ Roll Call in an interview conducted at her office-apartment just blocks from Nationals Park. “We want to convert the financial industry system from the analog age to the digital age.” 

Barefoot, a native of Danbury, Conn., says it isn’t entirely the regulators’ fault they have so far been unable to keep up with the rapidly shifting fintech landscape. She and AIR co-founder and Executive Director David Ehrich issued a report in January that found even as innovation speeds up, regulators are often blocked by laws and protocols that have worthy goals but unintended consequences.

[Duo seeks to bridge information divide in fintech industry]

The report, titled “Financial Regulators’ Dilemma,” was the result of a yearlong project by Barefoot, AIR and the Buckley LLP international law firm, which worked on a pro bono basis, to conduct candid, confidential interviews with senior personnel at financial regulatory agencies. The aim was to identify laws, regulations and practices that stifle innovation.

Old laws get in the way

Over the course of these interviews, regulators often complained that laws dictating how their agencies operate are more than 50 years old. 

The Freedom of Information Act, enacted in 1966, was cited by several regulators as a major barrier to effective collaboration between regulators and financial technology firms. Barefoot’s group learned that while fintech companies may be willing to share key proprietary information with a regulator to inform policy choices, it wouldn’t do so if there’s a risk that competitors could obtain it.

“For example, a business may opt not to share with a regulator the algorithm underlying a new underwriting technology because of the possibility that the algorithm could be publicly released in response to a FOIA request — potentially subjecting the business to competitive and legal risk,” the AIR report said.

Curry, who is now a partner with the Boston law firm Nutter McClennen & Fish LLP and a member of AIR’s board, said there is a real concern among financial technology firms about keeping trade information confidential.

Barefoot worked with Kabir Kumar, an executive with Flourish Ventures — which is partially funded by Pierre Omidyar, the founder of eBay — in arranging and conducting the discussions.

Regulators also pointed to the 1980 Paperwork Reduction Act as a “significant hurdle” to regulatory fintech innovation.

The law places strict limits on how federal agencies may collect information from outside of the government, including voluntary submissions of data. Before an agency may collect data from banking, fintech and other industries, it must solicit public comments on the request for a period that generally lasts at least 90 days. The proposed information collection must then be reviewed and approved by the White House Office of Management and Budget. 

Requests may take six to nine months to be finalized, meaning they might be outdated before the agency can even begin to collect information. 

“Accordingly, it is no surprise that certain agencies may not feel motivated to request information and proceed through the PRA approval process,” AIR writes.

And then there is the Antideficiency Act, a law dating to the years after the Civil War that can impose administrative and even criminal penalties on regulators who accept voluntary services for the U.S. The 150-year-old law is inhibiting regulators from accepting freely given information from academics and professionals involved in the fintech industry.

Barefoot and AIR plan to keep the spotlight on the issue for the foreseeable future. In the next few weeks, the organization is set to issue a request for public comments on a “RegTech Manifesto” that will advocate for a digital redesign of the financial regulatory system. 

‘Regulatory boot camp’

Barefoot also says AIR is planning what she called a “regulatory boot camp” later this year in which the group will bring regulators and fintech executives together in Silicon Valley so both can learn about each other’s products and processes. She says regulators have already expressed enthusiasm, as have members of Congress, leading her to consider a second boot camp in Washington, D.C., specifically for lawmakers.

Ehrich — who has worked for 20 years in the financial industry, including stints with American Express Co. and JPMorgan Chase & Co., and recently co-founded Petal, a fintech credit card company — told CQ Roll Call that AIR is “trying to catalyze a new model of collaboration” between regulators and industry, “and, importantly, among regulators themselves.”

Barefoot, in addition to her work at AIR, hosts a fintech podcast. Recent guests include Federal Deposit Insurance Corporation Chairwoman Jelena McWilliams and Comptroller of the Currency Joseph M. Otting. She serves on the Milken Institute FinTech Advisory Committee.

“There are so many people who just think you can’t change government,” she told CQ Roll Call. “I don’t agree with that. … It has to change.”