The new leadership of the Consumer Financial Protection Bureau has been initiating reforms at a breathtaking pace. One place where such reform would be most welcome would be to the agency’s broken “no-action letter” policy.
The policy was promulgated in February 2016 as part of the bureau's "Project Catalyst," to provide fintech innovators with a way to ensure, in advance, that their new products and services would not become fodder for the bureau’s enforcement efforts.
However, the policy has so far failed in that mission — only one no-action letter has been issued in the two years since the policy’s adoption.
This failure tells a larger story about the bureau’s approach to the financial services industry over the past six years. The no-action letter policy has underperformed because the CFPB’s interest in fostering innovation could not overcome its suspicion of the financial services industry. That suspicion led to a policy that demanded too much and promised too little.
Under new leadership, the bureau now has an opportunity to reinvigorate the no-action-letter policy by simply recalibrating its burdens and benefits.
At present, the burdens of seeking a no-action letter are excessive. The application not only requires large amounts of information, but many requirements are unrelated to the question of whether an innovative product or service would comply with the law.
The application requires, for example, that the requester affirm that they have not been subject to any undisclosed adverse supervisory or enforcement action over the past ten years. The application also seeks advance commitments, including agreements to share information and data after a letter has been issued.
Other portions of the application require detailed showings regarding the product’s benefits to consumers — and that the applicant set forth reasons why the bureau might not grant the application, such as the risks to consumers and the regulatory uncertainty surrounding the proposed product or service.
In short, the bureau’s policy conceives of the innovator as a supplicant who must prove their virtue, swear their ongoing fealty, and justify their desire for guidance.
A more effective approach would be for the CFPB to conceive of the innovator as a potential customer for the bureau’s assistance in complying with the law. This new approach would require less information about the requester’s supervisory history. After all, the bureau should be more — not less — interested in providing guidance to an innovator who has already experienced difficulties in complying with the law. A reformed no-action policy would also shed the agency’s efforts to obtain advance commitments to share information and data. The bureau already has ample supervisory and enforcement tools to obtain necessary information. Imposing additional requirements reasonably raises concerns at companies that are protective about information that is, by definition, on the cutting edge of innovation.
Most importantly, this new paradigm would assume that applicants are proceeding in good faith. Instead of requiring that the innovator demonstrate substantial consumer benefits, the bureau could trust that the market will make that judgment after the new product becomes available. Instead of putting an innovator in a no-win situation by asking them to identify consumer risks and regulatory uncertainty, the CFPB could itself identify any such issues and allow the innovator to respond as needed. In short, the bureau should recognize that it misread the market for no-action letters and set the price too high. It should now innovate and offer a lower-cost product.
The other way to reinvigorate no-action letters is to increase their value. The CFPB has stated that such a letter does not “[r]estrict or limit in any way the Bureau’s discretion,” nor “create or confer . . . any substantive or procedural rights or defenses.” The policy also makes clear that the bureau may revoke the letter at any time — and that such letters are “not intended to be honored or deferred to in any way by any court or any other government agency or person.” Given these limitations, it is no surprise that there has been little interest in obtaining a no-action letter from the agency.
Here too, the bureau needs to rethink its approach. When the CFPB brings an enforcement action, it purports to speak with great authority regarding a set of facts and the meaning of applicable law, including the general prohibitions on unfair, deceptive and abusive practices.
Unfortunately, this certainty vanishes where it is most needed — when the bureau provides guidance that can help fintech and other companies comply with the law. For example, the bureau’s no-action policy makes clear that the bureau is particularly unlikely to address whether a product or service is unfair, deceptive or abusive.
A reformed approach to no-action letters would conceive of such letters as a boon to innovation — and to consumers — that the bureau is eager to provide. In order to foster innovation within the bounds of the law, the agency should offer, in appropriate cases, no-action letters that address all relevant legal issues and bind the bureau going forward. The bureau could also increase the value to innovators of participating in the no-action-letter process by setting a timetable for its response and committing to providing a written explanation of any declined application.
The ultimate beneficiaries of such an improved policy would be consumers. By removing the chilling effect of legal uncertainty, a revised policy would promote consumers’ access to innovative financial products and services. Moreover, a functioning no-action-letter policy would involve the bureau and innovators working together to find ways to avoid consumer harm. Such a proactive, preventative approach to compliance is far better for consumers than an enforcement action brought only after consumers have been injured.
Reforming the CFPB’s enforcement procedures is important. However, rebuilding the bureau’s no-action letter and other policies to increase compliance and reduce the need for enforcement would be an even more substantial legacy for the new generation of bureau leadership.