Plans for a Federal FinTech “Sandbox” Draw Controversy
With the rise of FinTechs over that past decade or so, one of the big questions that has plagued regulators is how to protect consumers from these new financial products without stifling progress. One proposed solution that’s been adopted both abroad and at home is the concept of a “sandbox” that allows approved companies to try new ideas without running into further regulatory restraints. As Bloomberg Businessweek reports, some state regulators and federal regulators are embracing the concept of sandboxes while others blast the idea.
Back in December, the Consumer Financial Protection Bureau proposed the creation of a federal sandbox as a way to foster FinTech innovation. Such a program would invite companies to apply in order to receive certain regulatory exemptions. However participants would be required to detail their efforts and plans for protecting consumers and reimbursing anyone who was harmed.
Naturally not everyone is on board with the CFPB’s sandbox plans. Among them is former New York Department of Financial Services superintendent Mario Vullo. Questioning the move, Vullo said, “Why allow companies that aren’t ready to provide financial services to the public to be permitted to do so?” Vullo has been critical of FinTech regulation in the past, filing a lawsuit against the Office of the Comptroller of the Currency over their intention to offer special purpose national bank charters. Commenting on the deregulatory trend for FinTech, Vullo said, “Ten years ago, we went through a crisis because the loosening of regulations permitted institutions to take on risk at the expense of the consumer. It’s like people have amnesia.”
Despite assertions that a sandbox program would betray the very principle the CFPB was created on, Paul Watkins of the agency’s Office of Innovation recently explained, “[I]nnovation is part of consumer protection—these things are not opposed.” He went on to say that the purpose of the agency “is to ensure competition within markets and ensure consumer access,” noting that these current efforts are helping to do just that.
Turning from federal to state efforts, last year Arizona governor Doug Ducey signed House Bill 2434, which made the state the first in the U.S. create a FinTech sandbox. At the time of that signing, Arizona Attorney General Mark Brnovich said, “The idea of a regulatory FinTech sandbox is not new, and while it’s being discussed at the federal level, Congress is moving at a glacial pace.” He continued, “Arizona has always been a state for big ideas and this is just one more place where we are trailblazing in entrepreneurship and innovation. I hope to see the sandbox serve as a catalyst for capital investment in Arizona and provide opportunities for Arizona businesses and consumers to thrive.” Bloomberg notes that, currently, Arizona’s sandbox only allows companies to offer test products to consumers in the Grand Canyon state, although the CFPB’s plan could change that.
Like we’ve seen with the pushback against the OCC, the CFPB does face opposition in their plans to create a FinTech sandbox. As a result it’s not clear how likely the proposal is to pass. However Bloomberg notes that more than 3,300 FinTech startups have emerged since 2010 despite the lack of such a program. Thus, regardless of whether these latest regulatory plans come to fruition, you can be sure that innovation won’t be stopped anytime soon.