The Consumer Financial Protection Bureau took an important step towards promoting innovation in financial services at the end of 2018, issuing a proposed policy on no-action letters and the bureau’s “product sandbox.” The policy provides a blueprint for fostering innovation, but the real work lies in building new and improved products and services for consumers. That effort will require the time and energy of the bureau, industry and consumer advocates alike.
The bureau’s new policy, which is still subject to public comment and revision, reflects considerable continuity with similar policies advanced by the bureau under former Director Richard Cordray.
As before, the bureau is offering no-action letters to innovators who need comfort that their effort to deliver a new product or service will not yield an enforcement action. In addition, the product sandbox has its roots in the bureau’s prior innovation effort, Project Catalyst.
However, the bureau’s prior policies did not succeed. The bureau’s initial no-action letter policy issued just one such letter in three years, and the bureau launched a trial disclosure policy in 2014 that was never used. What’s more, the bureau’s use of enforcement as a tool for announcing its views on the law made innovators skittish that their efforts to create new products would merely create new law.
The bureau’s proposed innovation policy reflects the lessons of its past efforts. The new no-action letter policy would reduce the burdens of applications while enhancing the benefits to successful applicants. The bureau’s product sandbox is an even bigger leap forward, as it offers more than a promise of no action. Instead, the bureau would proactively clear legal obstacles to a bank or other entity that seeks to offer consumers an innovative financial product or service.
Given the lack of applicants for the bureau’s initial efforts to foster innovation, it will need to market these new opportunities with the vigor previously reserved for the bureau’s announcements of enforcement cases. Fortunately, the bureau has a lot to offer. Under the prior policy, no-action letters were limited in time and coverage. The bureau’s new policy offers a longer time horizon and more complete protection. Meanwhile, the product sandbox would involve the bureau using the power Congress gave it to formally exempt some products and services from the strictures of specific statutes or regulations. In addition, the bureau has committed to responding to completed applications within 60 days.
The financial services industry should seek to meet the bureau halfway. To be sure, there are serious questions about how no-action letters and product sandbox approvals and exemptions will work, including how the bureau can provide adequate protection to innovators who face other state, federal, and international regulators. However, financial institutions also have much to gain from the bureau’s new policy. Because they deal with the interaction of customers and compliance every day, banks and other financial institutions understand where legal uncertainty, or particular federal statutes and regulations, are hampering them from serving their customers. Those who are willing to be pioneers in using the bureau’s new innovation tools will also be leaders in providing innovative products, services and disclosures that better meet customer needs.
Consumer advocates should seek to meet the bureau halfway as well. To date, many consumer groups have opposed the bureau’s efforts to foster innovation out of concern that they would help insulate financial institutions from enforcement actions. However, there is ample reason to believe that consumers will benefit from the bureau’s new no-action letter and product sandbox policy. The policy explicitly and repeatedly states that relief will be granted only when the applicant can demonstrate that consumers will benefit from the new product or service. Moreover, any letter, approval or exemption will be public, and so may be measured against that standard when issued — rather than opposed in the abstract.
With these critical safeguards in place, consumer advocates could serve the important goals of consumer access and education by working with the bureau and industry on innovation. New financial products and services create the potential to expand consumers’ access to financial services. New disclosures may improve consumers’ ability to make smart financial choices. In both cases, consumer advocates have far more to gain for their clients by seeking to participate in innovation, rather than insist that statutes and regulations written decades ago must permit no exceptions or experimentation. After all, one model for innovation is Director Cordray’s “Know Before You Owe” initiative, which helped consumers by reducing the size and number of mortgage disclosures.
In the eight years since the bureau first opened its doors, the financial services industry has changed faster than the bureau could have possibly accommodated. In the eight years ahead, we expect further innovations such as the use of artificial intelligence for credit underwriting and fraud detection, distributed ledger technologies for cross-border funds transfers , mobile application and SMS message delivery channels for banking products and services traditionally reserved for in-branch and telephone interactions, and the use of big data to augment financial crimes compliance.
The bureau’s no-action letter and product sandbox policy simply acknowledge that industry and consumers alike will be better off if statutes and regulations written for one era’s challenges can be flexibly applied as circumstances change. In doing so, the bureau has laid the groundwork for regulatory innovation that is as dynamic as the market requires.
