CFPB Discusses Fintech ‘Sandbox’ at Cato Event

Despite being a decade old, the Dodd-Frank Wall Street Reform and Consumer Protection Act remains controversial. While the bill made sweeping changes to how the financial system of the United States was regulated, the single most controversial piece of the law remains Title X, the section that created the Bureau of Consumer Financial Protection, or CFPB. 

Created as a response to the last financial crisis, the CFPB is now looking forward to next-generation financial regulation.

On Jan. 17 at the Cato Institute, Paul Watkins, assistant director of the recently established CFPB Office of Innovation, outlined the bureau’s proposal to create a financial technology, or “fintech,” pilot project program. This innovation program, more commonly known as a regulatory sandbox, would provide a two-year regulatory “safe harbor” for companies looking to offer certain types of lending products or experiment with disclosures in exchange for expansive data disclosure. In other words, the sandbox affords companies a trial period for determining whether these practices are profitable — and the CFPB time to evaluate whether they actually benefit consumers.

Watkins outlined his agency’s three-pronged approach to consumer protection. These prongs include traditional enforcement, consumer education, and providing consumers with options and access to a wide variety of financial products. The sandbox program, Watkins said, falls into that last category. 

Through the sandbox program, regulators seek to gain a working knowledge of new financial technology before its full implementation. Typically, regulations tend to be reactive, rather than proactive.

Watkins went on to explain that many of today’s consumer-facing financial technologies, such as online banking and mobile electronic payments, would not have existed if regulators had not fostered an innovative market, but instead solely relied on enforcement measures. 

One of the proposal’s most innovative aspects applies to trade associations. Under the proposed rule, the CFPB would allow them to apply for general admittance to the sandbox. Allowing trade groups in may generate more interest for the sandbox among companies, as it would save them money. Individual firms would split the program’s costs and data sharing responsibilities through their respective associations. 

Setting up the CFPB’s regulatory sandbox will not be without challenges. It will have to navigate between 10 federal financial regulators, 50 state attorneys general, and 50 state banking commissions. In order for the CFPB’s regulatory sandbox to be effective, the bureau will need the cooperation of every federal financial regulator and a reasonable number of state AGs and banking commissions.

After the presentation, Todd Zywicki, a professor at George Mason University’s Antonin Scalia Law School and a senior fellow with the Cato Institute, led a panel discussion with Watkins and others. The panel included Diego Zuluaga, a policy analyst with Cato, and Conan French, senior advisor for innovation and fintech at the Institute for International Finance, as well as Eric Mogilnicki, who is a partner with Covington & Burling.

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