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“If you look at history, innovation doesn't come just from giving people incentives; it comes from creating environments where their ideas can connect.”
– Steven Johnson, Author
We are a nation of innovators, and our economy benefits greatly because of it. As Steven Johnson aptly noted, innovators are much more likely to succeed if they operate in an environment where their ideas can connect. Encouragingly, the Consumer Financial Protection Bureau (CFPB) recently took much needed first steps and adopted policies that promote innovation and create environments where ideas and people can connect—providing regulatory clarity for businesses while promoting responsible innovation on behalf of consumers.
Innovators often face a common barrier prior to making their idea or product public—testing it in a complex regulatory environment. This is where regulators have an opportunity to play a pivotal role in incentivizing U.S. innovation. Allowing companies, new and established, to test the feasibility of a product or idea in areas that lack regulatory certainty is important for all industries, not just financial services. In the health sector, these efforts are called “demonstration projects.” In the transportation sector, these efforts are called “pilot programs.” And now, thanks to three new policies released last week by the CFPB, the financial services sector has the space to innovate in a way that benefits consumers.
- No-Action Letter (NAL) Policy: The new NAL Policy improves on the Bureau’s 2016 NAL Policy by having, among other things, a more streamlined review process focusing on the consumer benefits and risks of the product or service in question. The CFPB filed its first NAL in response to a request by the Department of Housing and Urban Development (HUD) on behalf of more than 1,600 housing counseling agencies (HCAs) that participate in HUD’s housing counseling program.
- Trial Disclosure Program (TDP) Policy: Under the new TDP Policy, entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the Bureau. The Dodd-Frank Act gives the Bureau the authority to provide certain legal protections for entities to conduct trial disclosure programs, as outlined in the TDP Policy. The new policy streamlines the application and review process.
- Compliance Assistance Sandbox (CAS) Policy: The CAS Policy enables testing of a financial product or service where there is regulatory uncertainty. After the Bureau evaluates the product or service for compliance with relevant law, an approved applicant that complies in good faith with the terms of the approval will have a “safe harbor” from liability for specified conduct during the testing period. Approvals under the CAS Policy will provide protection from liability under the Truth in Lending Act, the Electronic Fund Transfer Act, or the Equal Credit Opportunity Act.
But CFPB didn’t stop there. The CFPB seized the opportunity to connect state and federal regulators with the launch of the American Consumer Financial Innovation Network (ACFIN).
According to its charter, ACFIN is a partnership between state and federal policymakers intended to facilitate innovation that benefits consumers through greater competition, consumer access, or financial inclusion in markets for consumer financial products and services. Members of ACFIN facilitate innovation within the United States through cross-jurisdictional coordination and information-sharing. The CFPB invited all state regulators to join ACFIN, and the initial members are the Attorneys General of: Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah.
Why does this matter? Simply, promoting responsible financial services innovation while creating an environment that allows it to flourish benefits U.S. businesses and consumers. Businesses will continue to reside and innovate in the United States with greater regulatory clarity while consumers will increasingly benefit from improved financial services products. Further, the U.S. signals to the global financial services sector that we continue to lead in the space.
We look forward to leveraging the momentum of last week’s announcements by working with the CFPB to secure rules of the road that appropriately balance the private sector’s need for clarity and consumer’s need for fair, transparent and competitive access to financial products and services.