OCC: OCC Proposes Electronic Banking Rules

The Comptroller of the Currency has proposed a comprehensive rule on electronic banking. This follows from the OCC's February 2000 advance notice of proposed rulemaking, on which seven banks commented. The scope of this proposal is broad, designed to accommodate most issues relating to electronic tools and services used and offered by banks. The purpose of the rule is to ensure that banking activities are conducted in a manner consistent with safety and soundness. In doing this, the proposed rule reaches into some interesting areas.The rule has three major categories or components: national bank powers, location of banks with respect to electronic services, and safety and soundness requirements for shared cyber-space. PowersThe longest portion of the proposal deals with national bank powers. The proposal restates that national banks may function as finders. However, acting as a broker would be forbidden. Another principle in national bank powers would be that activities must be conducted in an manner to ensure safety and soundness. The electronic activity must also be conducted in a manner consistent with applicable state laws and banking powers.The OCC would consider four factors to consider whether an electronic activity is art of the business of banking. This includes whether the activity is functionally equivalent to or a logical outgrowth of a banking activity, whether the activity benefits both the bank and its customers, whether it presents the types of risks that banks are experienced in managing, and whether it is consistent with applicable law. For compliance managers, there are two strategic aspects of this determination. First, the OCC will look at whether the activity benefits both the bank and its customers. This is the sort of mutual benefit or protection that lies at the heart of consumer protection laws. Here, the issue of customer benefit is embedded in the consideration of whether or not a national bank can be authorized to engage in an activity.Second, the OCC will look at the experience of banks in managing risk, and particularly the types of risk that banks manage. Compliance is a form of risk management. The skills and experience of the bank's compliance manager and compliance program may very well play a determinative role in the OCC's decision to authorize an activity.LocationThe proposal established location is defined for purposes of electronic services. The location is tied, to the extent, possible, to the traditional concept of the bank. In terms of location, there will be some connection with the bank's bricks-and-mortar presence. For banks that are exclusively cyber-banks, the location would be the office identified as its location for purposes of 12 USC 22 or 12 USC 30. This approach may have implications for CRA because it contains an implicit emphasis on physical location.Safety and SoundnessThe safety and soundness aspect of the rule places heavy emphasis on the distinction between core banking services and those that are peripheral to banking. The primary safety and soundness concern is that customers can distinguish between banking services and those offered by a subsidiary or a third party. It comes down to disclosures and product presentation.This portion of the rule would require the familiar mantra of clear and conspicuous disclosures. The information disclosed should be "simple, direct, readily understandable, and designed to call attention to the fact that the bank does not provide, endorse, or guarantee" the product.Comments are due to the OCC no later than August 31, 2001.Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 8, 8/01