CFPB's fintech regulatory sandbox “completely overreaching”

By Alex Hamilton | 11 April 2019

The US Consumer Financial Protection Bureau (CFPB)’s proposed federal fintech sandbox and relaxed regulatory regime has met criticism from state attorneys, while some in the alternative finance space have called the measures “completely overreaching”.

22 state attorneys filed a letter in February urging the CFPB to reconsider its proposed policies on the creation of a federal-level regulatory sandbox, on the grounds that it would put Americans at risk.

“Irresponsible banking practices and lax regulation pose significant risks not only to consumers, but to the entire US financial system, as Americans painfully learned during the financial crisis,” the group wrote. “Our experience has taught us that not all innovation is created equal, and many risks posed by emerging technologies can be difficult, if not impossible, to foresee.”

In December, the CFPB outlined its new approach when it comes to the issuance of no-action letters (NALs), which allow a firm to experiment with new technologies or actions without threat of action from a regulatory body. In its proposal, the CFPB stated that it had only issued one NAL since it implemented the process in 2014.

“The bureau believes this strongly suggests that both the process required to obtain [an NAL] and the relief available have not provided firms with sufficient incentives,” the agency wrote. It also announced plans to eliminate elements of the NAL application process, including the need for data sharing.

Paul Watkins, director of the office of innovation at the CFPB, speaking on a January panel for think tank the Cato Institute, said that NALs would be more efficiently processed and more attractive to the industry, and noted that the agency had been criticized in the past for being slow and requiring too much information from potential applicants.

As well as reforming NALs, the CFPB proposed the establishment of a federal sandbox, which would provide similar relief to an NAL, but also includes three statutory “safe harbour” provisions, which would provide relief for participants from state laws on financial services.

“The reaction by CFPB is completely overreaching and it should not have any say in the future of financial innovation, which would ultimately serve to benefit investors and consumers,” said Sang Lee, CEO and co-founder of alternative investment firm DarcMatter. “The CFPB was created under the Dodd-Frank Act which was structured in reaction to consumer-facing financial products by the existing players and framework, not from technology innovators.

“The US represents the deepest capital market in the world and is still coming off the direct memory of the financial crisis,” said Lee. “However, it must be remembered that the crisis was not caused by technological innovation, but rather the lack of control within larger organizations for understanding and mitigating risk.”

The American Bankers Association (ABA), US Chamber of Commerce, and Consumers Banking Association noted their approval of the CFPB’s measures in a February 2019 letter. “The development and market viability of innovative products require a flexible and receptive environment, which the [CFPB] plays a key role in fostering,” the group wrote. “If financial regulators, including the bureau, fail to create such an environment, innovative companies will likely forego investments that would benefit US consumers or invest abroad.”

While the letter encouraged the CFPB in its efforts, the three agencies asked for it to work together with other regulators in the US: “We urge the bureau to refine further its policy and more closely align it with the well-established and effective programs of other federal regulators, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).”

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