Finding the Balance Between Innovation and Regulation - How Companies Can Leverage the CFPB’s Regulatory Policies to Drive Innovation

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Over the past few years, innovation has risen to the top of the agenda for many financial services companies. The global pandemic has only elevated innovation as a priority, putting even more pressure on financial institutions to introduce innovative products and services that meet new customer demands. As companies work to be innovative, however, they should constantly consider the regulatory impact of their efforts; noncompliance can lead to severe penalties.

Around the US, regulators are working to break down the regulatory barriers hindering innovation in financial services. At the federal level, the Consumer Financial Protection Bureau (CFPB) has established policies to help financial services companies gain assurance that their innovation efforts will not face regulatory action, as long as their products/services meet certain consumer protection standards.

In this article, we provide a brief overview of the CFPB’s Office of Innovation and its innovation policy programs, and identify actions organizations should consider prior to developing a product or service.

CFPB’s Office of Innovation

In 2018, the CFPB created an Office of Innovation to support innovation, promote competition, and improve customer access to financial services. Section 5511 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is the statutory impetus for the Office of Innovation’s activities; this section notes that one of the objectives of the CFPB is to ensure that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.

In addition to managing key innovation policies, the Office of Innovation also works with state regulators as part of the American Consumer Financial Innovation Network, and with global regulators as part of the Global Financial Innovation Network, to foster innovation experiences and best practices.

Spurring Innovation: 3 Policy Programs for Financial Services

One of the primary goals of the Office of Innovation is to provide increased regulatory certainty to companies and others that are developing innovative financial products and services. To help with this, it oversees three specific policy programs aimed at fostering innovation. These policies can be utilized by both traditional depositories seeking to offer new products or services, as well as by fintech companies seeking to test their products, services, or disclosures without fear of legal liability. These policies include:

The No-Action Letter Policy

The Office of Innovation provides organizations with a no-action letter (NAL) stating that under certain conditions and circumstances, the CFPB will not take enforcement or supervisory action under the CFPB’s authority or jurisdiction with respect to a certain product or service. Before issuing a NAL, the Office of Innovation assesses each application based on its potential for consumer benefits or risks, the reason the applicant might need a NAL, and the CFPB’s priorities. The NAL policy is not time-limited, nor does it require recipients to share data—although it does require the recipient to notify the Office of Innovation if there are any material changes to the application and to provide information to the office if the product or service does not perform as anticipated.

Trial Disclosure Policy

The trial disclosure policy (TDP) allows applicants to propose and then conduct in-market testing of disclosures for financial products/services that might not otherwise comply with existing federal law. Successful applicants receive a TDP waiver that provides the organization with a legal safe harbor to conduct testing of an innovative disclosure for a specific duration, as well as, potentially, a defined geographic area and specific number of customers. It also exempts the recipient from compliance with existing disclosure requirements. Recipients of a TDP waiver are required to share data with the Office of Innovation so that it can assess the effects of the trial on consumer understanding and other factors.

Compliance Assistance Sandbox Policy

The Compliance Assistance Sandbox Policy (CASP) provides an opportunity for companies to obtain a safe harbor under the Truth in Lending Act, Electronic Fund Transfer Act, or Equal Credit Opportunity Act so that they can test the offering of innovative financial products and services provided in good-faith compliance. Successful applicants are granted the safe harbor for a limited time, although they can apply for extensions. Similar to the TDP, CASP activities require recipients to share data with the office in order to inform CFPB regulatory activities in the future.

One of the unique aspects of the Office of Innovation’s policies is the inclusion of a template function that can be used with any of the three policies. The template function allows for a third party—such as a trade association, consumer group, or service provider—to apply for a template. While the template is legally nonoperative, it can be used as a framework for first-party applicants seeking to test a similar product/service/disclosure to one that has already been approved to use in their applications and to receive expedited review of their applications pursuant to the template.

Working With Financial Institution Programs: Where to Start

For organizations looking to offer or support the offering of innovative products and services, the Office of Innovation’s new programs can provide regulatory certainty related to those areas that the CFPB oversees. In order to take advantage of these programs, companies should consider the following activities:

  • Work with your advisors to identify applicable programs: Before moving forward, companies should work with their legal, regulatory, or compliance experts to identify specific regulatory programs that would be applicable given their innovation agenda. A company’s advisors can ensure that they are considering the most relevant and applicable programs to apply to, whether offered by the CFPB or by a state or other regulator.
  • Review policy documents and granted applications: If the CFPB programs are identified as relevant, companies should review the policy documents available on the CFPB’s website, in addition to the granted applications. These materials can provide a foundation for understanding whether a company’s proposed innovations would align with one of the programs.
  • Hold an initial discussion with the Office of Innovation: Given the unique nature of innovation opportunities in the financial services sector, prospective applicants are encouraged to consider setting up a meeting with the Office of Innovation prior to developing a full application. This process can help organizations better understand the goals and applicability of the different policies, which can help streamline the application process. The office is open to holding informal meetings with potential applicants; there is no requirement to submit a preliminary application prior to requesting a meeting.
  • Develop the application: Once an organization has confirmed the applicability of the CFPB’s innovation policy programs, they can work with their advisors to submit the appropriate applications.

Finding the Balance Between Innovation and Regulation

In today’s world, innovation is a top priority for many organizations within the financial services sector—including financial services companies, fintechs, trade associations, consumer advocacy groups, and regulators. While regulation often lags innovation, taking advantage of innovation policies and programs like the no-action letter policy, the trial disclosure policy, and the Compliance Assistance Sandbox Policy offered by the CFPB Office of Innovation, can help give companies the confidence to move forward without fear of regulatory sanction. 

Contributing author: Craig J. Saperstein, Partner at Pillsbury Winthrop Shaw Pittman LLP.

It's pretty clear that the pace of financial services is outstripping the old regulations and regulatory framework. The old system of local jurisdiction and local licensing made sense and doesn't so much in a digital environment.

Alma Angotti, Global Legislative & Regulatory Risk Leader

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