As the Consumer Financial Protection Bureau seeks to reinvent itself, the bureau should prioritize strengthening its fintech innovation initiative as part of its overhaul.
Launched in 2012, the CFPB’s Project Catalyst was designed to “support the creation and growth of innovative consumer financial products and services.” In other words, it was created to serve as an opportunity for the fintech industry and government regulators to work together on behalf of consumers.
In the last six years, however, not enough of those opportunities have been realized. In fact, a similar initiative launched by the U.K.’s Financial Conduct Authority years later is proving more useful to fintech companies. The U.K.’s so-called regulatory sandbox gives fintech firms access to a dedicated team who can help startups understand the regulatory framework, and how it applies to them, while they test their products in real-life situations to demonstrate what users need and manage potential risks. The sandbox is proving popular and the U.K. regulator is now exploring whether it should expand it to include letting fintech companies test their ideas with regulators from around the world.
We understand that the needs of U.S. consumers and the regulatory regime that governs our system are different from our European counterparts, but that doesn’t mean that our version of the sandbox has to fail.
True, there is no one silver bullet to support and encourage the development of new technologies, but we can encourage innovation that creates the next generation of financial products for consumers in a safe manner if we employ every option available.
Acting CFPB Director Mick Mulvaney should make Project Catalyst a focus in his pursuit of improving the bureau. While it’s impossible to predict what ideas today’s creative companies might want to take for a regulatory test run, there are ways for the bureau to improve this process.
For instance, while the agency's establishing a no-action letter through Project Catalyst, to give companies a respite from regulatory enforcement was a great first step, it doesn’t go far enough. An effective Project Catalyst must include a true safe harbor component, so companies are confident they aren’t just setting themselves up for punishment. At present, the regulators are more focused on preserving their flexibility than in reassuring innovators. For example, the bureau's no-action letter policy explicitly states that such a letter "does not restrict or limit in any way the bureau's discretion." A true safe harbor makes clear that an agency will not take enforcement action against a particular product or service.
The CFPB must also grant more companies no-action letters. Currently, only one company has received a no-action letter. By contrast, the Securities and Exchange Commission issued 104 no-action letters in 2015 alone and the Internal Revenue Service issues several hundred private letter rulings every year. Granted, these are established regulators with a proven track record and approach, but a serious Project Catalyst operation should surely be able to increase productivity in this area.
Project Catalyst should also make statements of enforcement policy to help establish the kind of explicit guardrails that open room for innovation. Statements of enforcement policy provide companies with advance notice of the way the agency will exercise such discretion. For example, the Department of Justice and Federal Trade Commission have issued a statement of antitrust enforcement policy that describes "antitrust safety zones" for hospital mergers. That policy statement maintains that “a merger within such a zone will not be challenged under the antitrust laws "absent extraordinary circumstances."
Finally, the CFPB could play an important coordinating role if it centralized and shared lessons learned from Project Catalyst with other regulatory agencies like the Office of the Comptroller of the Currency, the SEC, the Federal Deposit Insurance Corp., state regulators and elsewhere.
Transforming Project Catalyst would not be a way for companies to simply check a box with federal regulators. The financial services industry is and will remain one of the most heavily regulated industries. But new fintech companies need a way to manage regulatory risks during the testing stage of their products and services.
This is a good thing for consumers. The fintech sector is among the most innovative and fastest-growing sectors of the economy. According to the U.S. Department of Treasury, marketplace lending alone is projected to originate $90 billion in consumer and small- business loans in the U.S. by 2020. Already, the report noted, “online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital” and “small business loans are being originated to business owners for general working capital and expansion needs.”
In this rapidly expanding market, the CFPB should be able to identify more innovative and groundbreaking candidates for more no-action letters. Doing so will not only help the bureau fulfill its duty of protecting consumers, but it will tap into the full potential of ensuring consumers have access to the best possible financial services products.