CFPB FinTech Regulatory Innovation Initiatives Echo International Regimes
By Lawrence Kaplan & Lara Kaplan
The Consumer Financial Protection Bureau (“CFPB”) is taking a more active role in the U.S. FinTech regulatory space by placing innovation at the top of its agenda. In mid-September the CFPB announced new programs that invite firms into a regulatory conversation to facilitate innovation, identify consumer benefits, and provide regulatory clarity. These initiatives appear to reflect the lessons learned from the U.K.’s Financial Conduct Authority’s (“FCA”) approach to innovation, which is either coincidental or illustrates the effectiveness of the knowledge sharing under the Global Financial Innovation Network (“GFIN”).
The CFPB’s recent initiatives involve the establishment of two regulatory sandboxes as part of its innovation mission to promote common goals of “innovation competition and consumer financial access,”
Trial Disclosure Programestablished under authority granted to the CFPB under the Dodd–Frank Wall Street Reform and Consumer Protection Actto provide certain legal protections to firms to conduct trial programs. Currently, U.S. federal law provides that accurate and effective disclosures assist consumers in understanding the costs, benefits, and risks of various financial products and services. The CFPB is inviting firms to design and improve existing disclosures through context, format, or delivery mechanisms to advance consumer benefits, and not necessarily just for new products. This enables in-marketing testing of alternative disclosures for a set time, where firms benefit from a streamlined process and a waiver from existing rules where necessary.
Compliance Assistance Sandbox (“CAS”)which enables firms to test a financial product or service in order to seek regulatory clarity on how it is regulated. The CFPB will assess whether a firm’s product or service complies with relevant law, and if approved, that firm will have protection from liability under the Truth in Lending Act governing credit transactions,the Electronic Funds Transfer Act, governing electronic payments,or the Equal Credit Opportunity Act addressing discrimination in lending.The firm’s approval in the sandbox will end when its testing period ends, rather than be revoked. Further, this CFPB sandbox is focused on federal consumer law issues and therefore the CAS policy does not envision state pre-emption.
The CFPB’s policy approach and regulatory environment in these two sandboxes echoes a somewhat broader sandbox process that firms receive in the U.K., where the FCA affirmatively assesses a firm’s application into a sandbox cohort in accordance with certain eligibility criteria, e.g., whether there is a genuine innovation, the firm needs the sandbox, and what the consumer benefits would be. Once the FCA approves the application, the sandbox firm will work with a dedicated case officer to establish testing parameters, consumer safeguards, and expected outcomes. Depending on the type of firm, product, or service offered, the FCA broadly has the power to offer sandbox firms: (1) waivers for particular rules; (2) individual guidance on an interpretation of applicable rules; (3) restricted authorizations to carry on a regulated activity; and (4) a no enforcement action letter, which states that the FCA would not engage in enforcement proceedings against testing activities. As of April 2019, the FCA has 29 businesses in its fifth cohort of firms, having received 99 applications.
Moreover, the CFPB recently announced an updated No Action Letter (“NAL”) policy
The CFPB also announced a strengthening of its existing work in its Office of Innovation, which includes a “pitch a pilot” initiative, where a firm can approach the CFPB after having identified an issue and solution with a financial regulation.
Unlike consumer financial services regulation in the U.K. largely under the FCA’s supervision, the U.S. has a patchwork of consumer protection legislation adopted by states and at the federal level, with several different regulators involved in consumer financial services and Fintech innovation. To bridge that gap, and in order to promote cohesion and consistency on these issues, the CFPB is also launching the American Consumer Financial Innovation Network (“ACFIN”) to coordinate efforts between federal and state regulators to further shared objectives of consumer access, financial inclusion, and competition to ensure that consumer markets are free from fraud, discrimination, and deceptive practices. The initial members of the ACFIN
The CFPB and the FCA are part of GFIN, an international network of financial services regulators and authorities formally launched in January 2019, collaborating and sharing knowledge on FinTech for the benefit of consumers. GFIN aims to provide a more efficient way for innovative firms to interact with regulators, helping firms navigate between countries as they look to scale new ideas.
These initiatives illustrate that the CFPB has recognized that FinTechs need regulatory clarity, coordination, and support and are offering innovative programs that have proved successful abroad. Paul Hastings routinely advises FinTechs on a broad range of new products and regulations that could take advantage of the CFPB’s renewed focus on innovation and consumer interests.
Paul Hastings attorneys actively represent clients before both the CFPB and the FCA. Please contact us if you have any questions.
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