The Consumer Financial Protection Bureau is getting tired of letting fintech play in the sandbox.
In unveiling a recent restructuring of the agency's innovation office, CFPB Director Rohit Chopra said regulators were shifting away from policies that place "special regulatory treatment on individual companies." That spells twilight for a Trump-era policy that offered some new financial products safe regulatory harbor through a sandbox and a related effort to publish no-action letters. The sandbox initiative, led by the former Office of Innovation, tried to make it easier to bring new products to market, but was unpopular with consumer groups.
The CFPB's newly named Office of Competition and Innovation will focus on creating "market conditions where consumers have choices, the best products win and large incumbents cannot stifle competition by exploiting their network effects or market power,” the agency said in May.
As part of the restructuring, the CFPB said it reviewed the sandbox and no-action letter programs and found they "proved to be ineffective" and that some firms used the programs to indicate the bureau "conferred benefits upon them that the bureau expressly did not."
Despite declaring the program ineffective, a CFPB spokesperson said the agency "is still processing no-action letter and sandbox applications at this time." The agency's release encouraged companies to instead file formal rule-making petitions to ask for greater clarity on particular regulations.
The no-action letter policies and sandbox have not been widely used. But along with a series of other actions taken by the CFPB, their apparent sunset indicates a shifting regulatory stance on financial technology.
"The CFPB is sending clear signals that the growth of the fintech industry has resulted in increased risks to consumers," said Michael Gordon, an attorney with Ballard Spahr and former top CFPB official under the Obama administration. "While many fintech innovations are indeed consumer-friendly, I expect the CFPB to ramp up its scrutiny and take action against firms that fall short of their obligations."
The sandbox as a concept has had hype for some time in policy circles. The U.K.’s Financial Conduct Authority launched an early effort in 2015, allowing companies to test new products on a small subset of customers without fear of regulatory reprisal. There are 11 states with sandboxes that offer testing grounds in restricted markets, according to a list kept by Libertas Institute, a Utah-based think tank that promotes the sandbox concept nationally.
The CFPB's effort was the most prominent on the federal level. Utilizing either a template approval through the agency's compliance sandbox or a no-action letter from the CFPB, companies could apply to get a provisional OK to test out a new product within certain guidelines.
The agency granted six applications for no-action letters and three approvals under the sandbox program, mostly under the Office of Innovation launched in 2018.
Online lending service Upstart got the first no-action letter, in 2017, and a three-year extension in 2020. Bank of America received a no-action letter in November 2020 for its Balance Assist small-dollar credit product. Synchrony Bank that same year got approval under the sandbox program for a credit card designed to help people with poor credit improve their score.
Sandboxes in general have attracted plenty of scrutiny from consumer groups and even other regulators, who fear that the regulatory relief would be used to offer harmful products to consumers. When a Treasury Department report suggested expanding the concept to more federal regulators in 2018, Maria Vullo, the superintendent of New York State’s Department of Financial Services, fired off a statement that declared: "Toddlers play in sandboxes. Adults play by the rules."
Vullo, who now runs an advisory firm, said in an email that the CFPB is creating a more level playing field by declaring that "companies cannot experiment with consumers but instead must abide by all consumer protection laws and regulations."
The CFPB under Chopra had yet to approve any new no-action letters, so the reorganization of the office did not come as a total surprise. It also comes as the CFPB has pushed to expand its oversight authority over non-bank institutions and demanded banks and lenders explain their algorithms, showing the agency now aims to take a more aggressive stance toward the industry.
The announcement did open the door for companies working to improve access to banking options. "We will be looking at ways to clear obstacles and pave the path to help people have more options and more easily make choices that are best for their needs,” Chopra said in a statement. President Biden ordered the agency last summer to kickstart open banking by creating rules that make it easier for consumers to access their data.
"I do not think the current CFPB leadership is anti-fintech," said Dan Quan, a venture capital investor and former director of Project Catalyst at the CFPB, a precursor to the innovation office. "Innovation plays an important role in competition, which is central to their current agenda. The rebranding of this office simply means they will take a different approach from the previous administration when it comes to promoting innovation."
While the announcement did not say that the sandbox program will be shut down entirely, the CFPB's emphasis is now on rule-making petitions for companies that seek regulatory clarity on a product. That would allow for greater protections, as any rules would apply to the industry as a whole and be harder to revoke. But, as one legal analysis noted, there has been just one granted rule-making petition in the CFPB's nearly 11-year history.
So far, fintechs are taking a wait-and-see approach to the reorganized innovation office.
“Competition from financial technology companies drives lower costs, better services and more consumer choice," said Penny Lee, chief executive officer of the Financial Technology Association. "We look forward to working closely with the bureau to continue encouraging consumer-friendly competition and innovation."
