RegFi Episode 38: The FUTURES Act and Modernizing Financial Regulation
16 min listen
The FUTURES Act, a bipartisan legislative initiative recently reported by the House Financial Services Committee as part of a larger financial institutions legislative package, aims to foster technological modernization within financial regulatory agencies. In this episode, RegFi co-hosts Jerry Buckley and Sasha Leonhardt discuss the FUTURES Act and how it would address key findings from a pro bono report they authored with the Alliance for Innovative Regulation (AIR): “Financial Regulators’ Dilemma: Administrative and Regulatory Hurdles to Innovation.”
The conversation highlights challenges Federal regulators currently face when adopting new technologies, including a burdensome procurement process and cultural resistance across agencies, and how the proposed legislation seeks to address these hurdles by mandating comprehensive assessments of current technology systems and requiring regular reporting on improvements and future plans. Jerry and Sasha also discuss the bill’s current status, potential impact and prospects of advancing through Congress in a contested election year.
Links:
- Financial Regulators’ Dilemma: Administrative and Regulatory Hurdles to Innovation
- Orrick Financial & Fintech Advisory
- RegFiPodcast.com
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Jerry Buckley: Hello, this is Jerry Buckley, and I am here with RegFi co-host, Sasha Leonhardt. Today, we are going to be talking about the FUTURES Act, a legislative initiative that has bipartisan support and has been reported by the House Financial Services Committee as part of a larger financial institutions legislative package. The acronym FUTURES derives from “fostering use of technology to uphold regulatory effectiveness in supervision,” observing the long-time legislative practice of having the first letters of the bill’s title create an acronym that is descriptive of the bill’s purpose. The FUTURES Act was introduced by Representative Erin Houchin, a Republican from Indiana who serves on the House Financial Services Committee, and is co-sponsored by Representative Bill Foster, a Democrat from Illinois, who also serves on the committee, and by Representative French Hill of Arkansas, a senior Republican member of the committee. This bipartisan legislation aims to modernize technology systems within financial agencies responsible for regulating banks and credit unions, enhancing their capacity for effective supervision and oversight.
As our listeners know, a goal of the RegFi podcast series is to examine the ways in which financial regulation is likely to change over the next decade, given how technology advances are both changing the way in which financial services are being provided to consumers and businesses, and providing the potential for enhanced and more effective supervisory capabilities by the regulators. This is a subject that Sasha and I have spent some time thinking about. Several years ago, along with Jo Ann Barefoot at the Alliance for Innovative Regulation, or AIR, we undertook a pro bono project in which we interviewed the heads of innovation at the principal financial regulatory agencies. These interviews, conducted on a non-attribution basis, resulted in a report titled “Financial Regulators’ Dilemma: Administrative and Regulatory Hurdles to Innovation.” Many of the hurdles identified in that report remain to be cleared. The FUTURES Act provides a vehicle for regulators to identify and come to grips with the opportunities to enhance effectiveness of their supervisory role by using tools that rapidly advancing technology, including artificial intelligence, can provide.
Representatives Houchin, Foster, and Hill are leading the way in creating a vehicle to formally address this important regulatory priority. But before we turn to the specific requirements of the FUTURES Act, it might be worthwhile to recall some of the hurdles identified in the Financial Regulators Dilemma report. Sasha, at a high level, could you provide our listeners with some of the principal findings, particularly those that might impede the adoption of technology solutions?Sasha Leonhardt: Sure thing, Jerry. We’ve addressed this issue before on the podcast and mentioned our FUTURES Act report, but innovation at the agencies has been such a large issue and keeps coming up. So there remains a lot to discuss, including today. To answer your question, our report covered administrative issues, financial challenges, and cultural and personnel challenges at the agencies. But those last two are the ones that seem to be the really critical areas affecting the adoption of technology solutions and the things that we’re seeing in the current legislation in Congress. On the financial side, to provide a little more context on what we previously looked at, we considered the Anti-Deficiency Act and the Federal Acquisition Regulation. Now, under the Anti-Deficiency Act, this is a law that contains criminal penalties for spending money that is not appropriated by Congress and prohibits members of the government from accepting voluntary or free goods or services. Both of these have created challenges for agencies seeking to adopt new technologies.
First, they need to wait through the appropriations process, which, as anyone can tell you, is a long and complicated process in the best of Congresses, and certainly today. Even though the appropriations bills are essential, every year they become a major fight and often have other unrelated pieces of legislation attached to them as part of larger Christmas trees, which slows down the entire process even further. Getting line items added to these bills, such as individual appropriations for technology, is an art form, and congressional staffers and lobbyists have become experts in navigating how to get things added to these bills. But it remains a messy process at best. With respect to receiving free goods and services in particular, agencies, as we’ve understood in our research, tend to interpret this very conservatively. And we sense that this was at least in part tied to the risk of criminal penalties. Some of these examples: and I think it’s worth talking about one or two because we just thought they were very good illustrations of what’s going through the heads of those who are tasked with adopting new technologies within the agencies.
In one instance, a staffer said that a company wanted to provide its regulator with free access to an online resource just for evaluation purposes. But the regulator, after internal discussions, determined that this could violate the Anti-Deficiency Act because free access to this resource was a quote-unquote thing of value, and thus they could not accept it. In another instance, an agency wanted to bring in a professor to talk about some of their research, and the professor was willing to do it for free. But because the work that a professor does is learned and involves significant expenditure of effort, this was determined that it could be a voluntary service, even though it would not be charged for, and would have violated the ADA. Finally, there are implements to conducting pilot testing of new regulatory technologies. Some are seeing these as essential to technological development, but within some of the agencies, there’s a hesitancy even to do a no-cost pilot because, again, there is technically value to the technology used, and that could run afoul of the ADA’s prohibitions. Or at least, again, that’s the view that some of these agencies are taking.
With respect to the federal acquisition regulation, there is a long, drawn-out process to enter into any government contract. This is obviously a significant area where there’s a lot of scrutiny of these contracts to make sure there’s no waste, but there’s not a lot of flexibility around these rules. Yes, there are processes for smaller contracts, we’ve heard, but the threshold for what is a smaller contract and can go through a more abbreviated acquisition process is so low that in many instances it seems impractical to work on software for technological innovation. And one other thing we heard is that for some of these pieces of technology, they’re going to require a bigger adoption upfront, even for a pilot or for a test run, because if they’re using AI or machine learning, the more data they have to look at, the better they’re going to be. So if you’re doing just a limited rollout on a limited set of data, the software may not be as good as it would be if it had access to a more robust data pool.
The other thing we looked at that I think could be affecting technological development is the personnel side at these agencies. We discussed personnel and hiring policies and agency culture with the people we spoke with. Now, I’m not going to go into as much detail here, but I think the underlying point from both of these is that agencies aren’t going to be willing to adopt new technologies if there’s no one who’s going to expend the efforts and, frankly, their personal political capital to get these new technologies implemented. I know there’s a premium on having government provide stability and move slowly, but here there are risks that the agencies are moving so slowly that they may fall behind where the entities they’re regulating are and where others are. So, Jerry, that’s kind of an overview of where we are on the report we previously did.Jerry: Well, thanks, Sasha. A good summary of some of the major findings. So now let’s turn to the ways in which the FUTURES Act addresses these and other challenges facing the financial regulatory agencies. It’s axiomatic that the financial regulatory agencies find their constitutional justification in the authority granted to Congress under Article 1, Section 8, Clause 5. “The Congress shall have power to coin money, regulate the value thereof, and of foreign coin.” From these few words have sprung with House Financial Services Committee, the Senate Banking Committee, and the financial regulatory agencies, including the Federal Reserve, the Comptroller of the Currency, the Federal Deposits Insurance Corporation, and the National Credit Union Administration. These agencies, employing thousands of people and regulating institutions holding trillions of dollars of assets, tend to take on a life of their own. But it is worth recalling that their constitutional foundation and the ultimate responsibility of Congress is to govern the way in which these agencies operate.
Now, the significance of the FUTURES Act is that it is a congressional initiative that formally requires the financial regulatory agencies to address the critical need for modernization and regulatory technology infrastructure and to keep pace with the evolving financial landscape. By requiring comprehensive assessments of existing technology systems and identifying areas for improvement, the bill seeks to enhance the ability of regulatory agencies to conduct thorough supervision and ensure the safety and soundness of the financial system. Congresswoman Houchin, introducing legislation, said, “Our regulatory agencies must have up-to-date technology. Through the FUTURES Act, regulators will be able to access cutting-edge technology to protect both customers and financial institutions.” She also noted social media, 24-hour banking, and artificial intelligence will increase the speed and intensity of financial crises. And this bill is an important step to ensure our financial regulators have the tools they need to monitor and respond to these new threats.
Sasha, would you share with our listeners some of the key provisions of the legislation?Sasha: Sure thing. And I’ll note that this is as of the most recent version of April of this year, 2024. And obviously, as this moves through Congress, this may evolve. But right now, the bill addresses many of the same issues that we touched on, in our report from several years ago: The lack of access to real-time information, supervisory technology, new technology in particular versus outdated technology that’s currently in use, and procurement challenges. The legislation broadly requires studies of current state and future actions to address this. In terms of the comprehensive technology assessments that you addressed, Jerry, the bill requires federal regulatory agencies, specifically the Federal Reserve Board, the FDIC, OCC, CFPB, and NCUA, to conduct thorough assessments of their technology systems. Now, these assessments will identify current deficiencies and areas for improvement, including technology, hardware and software, their plans and procurement practices, workforce impacts, and information intake and analysis. These assessments must all be done within 180 days of enactment.
Going forward, there’s going to be a reporting requirement for the regulatory agencies to submit their reports to the House Financial Services Committee and Senate Banking Committee. These reports require a current state assessment of hardware and software, procurement practices, workforce reviews, and obtaining information. Again, the same issues that are part of the comprehensive technology assessments, just building on those assessments for the report. The second part of this report is forward-looking. Covered agencies must describe their plans to upgrade technology, their efforts to hire and train individuals as part of those upgrades, and an assessment of their costs. That is, both increased costs from the change, but also potential cost savings as a result of adopting new and improved technology.Jerry: The FUTURES Act, H.R. 7437, was unanimously approved to be included in the package of 13 bills reported by the House Financial Services Committee to the full house on April 17 of this year. So our listeners may ask, “Does this mean the bill is on its way to enactment?” Well, while the bill has support from a number of groups, including the Alliance for Innovative Regulation and the American Bankers Association, it, like other legislation, faces the fact that this is an election year. It is hard to get floor time for any legislation, and Congress tends to adjourn early to allow members the opportunity to meet with their constituents, that is, the voters. That said, it is not uncommon for legislation like the FUTURES Act to make its way into more comprehensive, must-pass bills like the National Defense Authorization Act. Sometimes must-pass bills are taken up in a rump session of the Congress occurring after the election. So to sum up, the future of the FUTURES Act remains to be seen.
The introduction of this bill is in itself a signal to the regulatory agencies that Congress expects them to be on top of technology developments and to let Congress know what progress is being made in this area. But even without an act, Congress can use oversight hearings and GAO investigations to monitor financial regulator progress.
Sasha, any last observations?Sasha: No, Jerry, I agree with everything you said. I think the only other thing I would add is that even if this doesn’t pass in the 2023 2024 Congress, I’m at least encouraged that we’re seeing progress on this today. I think getting a bill, even a draft forward, is a huge step and getting it out of Congress and referred through the committee to the whole in the House is very encouraging. So my hope is that this bill in some form or fashion would pass this year, either as a standalone or tacked onto another bill. But even if it doesn’t, I’m encouraged that there continues to be focus on what I think is a pressing issue. And hopefully it will pass at some point in the next few years. Jerry: Thanks, Sasha. And thanks to our listeners for listening.