Maria T. Vullo, the superintendent of New York's Department of Financial Services/courtesy photo Maria T. Vullo, the superintendent of New York’s Department of Financial Services/courtesy photo

Financial technology companies have long sought regulatory clarity on a federal scale—and they almost had it, with the federal Office of the Comptroller of the Currency’s July announcement that it would accept national bank charter applications from nondepository fintech companies.

But New York’s Department of Financial Services’ suit, Vullo v. Office of the Comptroller of the Currency, 18-cv-8377, filed Friday in the U.S. District Court for the Southern District of New York, could further delay national regulation, some practitioners said. DFS previously filed a suit last year hoping to block the OCC charter but federal Judge Naomi Reice Buchwald dismissed the the suit in December, saying it was premature.

Maria Vullo, the superintendent of New York’s DFS, said in Friday’s complaint that the fintech charter decision is “lawless, ill-conceived, and destabilizing of financial markets” and that it “puts New York financial consumers—and often the most vulnerable ones—at great risk of exploitation by federally-chartered entities.” The lawsuit argues that the OCC cannot offer national bank charters to fintech companies because, if they are not banks, the OCC does not have the authority to regulate them. Vullo and the DFS had no additional comment Monday. Vullo asked the court to bar the OCC from implementing the federal court’s decision in July to start accepting applications for charters. Other states have also indicated their intention to refile similar lawsuits.

The OCC insists that it does have the authority to regulate fintechs. “The agency is confident in its authority to grant national bank charters, including special purpose national bank charters, to companies that are engaged in the business of banking, meet the qualifications for becoming a national bank, and apply to conduct business as part of the federal banking system,” said the OCC’s director of public affairs Bryan Hubbard in a statement Monday. “The agency will vigorously defend that authority, but will not comment on pending or potential litigation.”

Catherine Brennan, a partner at Hudson Cook in Hanover, Maryland who works with national and state banks and financial companies, said on Monday, “whether or not New York is successful, they have a victory in that they have set the line with regard to what it wants from companies it might regulate in New York State.”

Brennan continued, “New York State is obviously a huge financial market and there will be some fintech companies that would be discouraged from even considering the OCC charter because of the DFS action. Anyone at a fintech company will need to weigh in the worth of the charter versus getting involved in a legal dispute with the Department” of Financial Services.

Companies who may have been drawn toward the OCC charter may now wait and see how the suit plays out before sinking resources into it, she said.

The charter would allow fintech companies to be regulated more like a bank on a national scale. Currently, most fintech companies operate under state regulations that vary in each jurisdiction. The confusion that stems from that can make business difficult and be a competitive disadvantage on a global scale, said Jeffrey Alberts, a Pryor Cashman partner who co-heads the firm’s financial institutions group.

“A lot of fintech companies are frustrated about the fact that they’re currently subject to regulation by dozens of different state regulators and they are excited about the possibility that with the OCC fintech charter there would be one regulator, and they would be able to deal with just that one regulator and just that one set of regulations,” he said.

But Alberts, like Brennan, said the DFS suit could be a roadblock for fintech companies who had sought the national bank charter. It’s not clear whether the national charter would be available long term.

“Now that the DFS has sued the OCC, I think fintech companies are reluctant to invest resources into getting that charter because they won’t know what the status of this pre-emption is,” Alberts said. “In essence, until the solution is resolved, they would be subject to regulation both by the OCC and by the states, and wouldn’t know who ultimately was going to win.”

Alberts added there have been concerns raised by traditional banks that the national charter will give fintech companies a competitive advantage, as it would allow the latter to operate with lower capital requirements under its regulation.