How the CFPB could help State Regulatory Sandboxes
I have previously written about the possibility of states establishing their own regulatory sandboxes for financial services. There is real potential value to states serving as true “laboratories of democracy”, but the challenge of federal overlap would need to be resolved. While I had previously discussed some general ways resolution could occur I would like to now turn to one specific option available today to the Bureau of Consumer Financial Protection (CFPB) to make state regulatory sandboxes more viable: Promulgating a rule that would exempt conduct conducted by firms under the auspices of a state sandboxes from Title X of Dodd-Frank. This exemption is allowed under the law and could help give firms the certainty they need that they will not face inconsistent CFPB enforcement.
Exempting conduct in state regulatory sandboxes (assuming reasonable standards) would be consistent with consumer protection because the test consumers would be protected by the requirements of the state sandbox. It would also protect consumers in the long term by encouraging innovation and competition, giving consumers more power in the market.
Unlike other pro-sandbox reforms that will likely require Congress to act, the CFPB already has this authority in hand. While no state has announced a fintech sandbox yet, the possibility of the CFPB overriding them may be part of the reason for their hesitation. The CFPB removing this threat could help encourage states to move forward. Using rulemaking to establish an exemption, rather than relying on enforcement discretion, would also give firms confidence that they will not face surprises and will have ample notice of any changes in policy. While this rule would not be a complete solution to all the issues that may bedevil state sandboxes, it could be an excellent first step.
