Saturday, 19 October 2019: 10:00 AM
In December 2018, the Consumer Financial Protection Bureau (CFPB) proposed a new “regulatory product sandbox” policy for covered financial products. A regulatory sandbox allows for some regulatory leeway, as innovators operate within a low-risk environment under the guidance of the regulator. The end goal of such a sandbox is to provide participating firms with a responsible way to bring their innovations to market.
The advantages of a regulatory sandbox relate to two general ideas. First, the rapid advancement of financial technology poses regulatory challenges, particularly when new products and services do not fit neatly within existing regulatory regimes. Second, consumers can benefit from innovation and competition, especially when risk remains properly managed by appropriate regulators.
Widely applied, regulatory sandboxes have the potential to shift the general regulatory climate from top-down and reactionary to a more permissive, yet responsible, environment that nurtures and guides innovations, rather than restricting them. In theory, this permissiveness will provide firms greater freedom to invest in and develop new technology products.
Many regulators and consumer advocates, however, remain skeptical that regulatory sandboxes will abdicate an agency’s role in protecting consumers in favor of policies that benefit businesses. How can the CFPB best design its regulatory product sandbox to foster market innovation while maintaining vigorous protection of consumers?
We seek to answer this question using an interdisciplinary analysis. First, this paper reviews the historical justification and use of sandboxes by regulators across the globe. Second, this paper examines the costs and benefits of the CFPB’s proposed regulatory product sandbox. Third, this paper concludes with policy suggestions through which the Bureau can better ensure the program will benefit consumers.
To effectively regulate in this more permissive environment, the CFPB will need to create applicant standards for entry, evaluation mechanisms, and best practices for timely approval or denial. For a federal product sandbox to show measures of success, the CFPB would likely need to take on the role of “regulatory coordinator” between consumers and consumer advocates, sandbox applicants, state and local governments, and other federal financial regulators. The Bureau will also need to establish safeguards to ensure that consumers that are harmed by a failed product will have means for restitution.
The advantages of a regulatory sandbox relate to two general ideas. First, the rapid advancement of financial technology poses regulatory challenges, particularly when new products and services do not fit neatly within existing regulatory regimes. Second, consumers can benefit from innovation and competition, especially when risk remains properly managed by appropriate regulators.
Widely applied, regulatory sandboxes have the potential to shift the general regulatory climate from top-down and reactionary to a more permissive, yet responsible, environment that nurtures and guides innovations, rather than restricting them. In theory, this permissiveness will provide firms greater freedom to invest in and develop new technology products.
Many regulators and consumer advocates, however, remain skeptical that regulatory sandboxes will abdicate an agency’s role in protecting consumers in favor of policies that benefit businesses. How can the CFPB best design its regulatory product sandbox to foster market innovation while maintaining vigorous protection of consumers?
We seek to answer this question using an interdisciplinary analysis. First, this paper reviews the historical justification and use of sandboxes by regulators across the globe. Second, this paper examines the costs and benefits of the CFPB’s proposed regulatory product sandbox. Third, this paper concludes with policy suggestions through which the Bureau can better ensure the program will benefit consumers.
To effectively regulate in this more permissive environment, the CFPB will need to create applicant standards for entry, evaluation mechanisms, and best practices for timely approval or denial. For a federal product sandbox to show measures of success, the CFPB would likely need to take on the role of “regulatory coordinator” between consumers and consumer advocates, sandbox applicants, state and local governments, and other federal financial regulators. The Bureau will also need to establish safeguards to ensure that consumers that are harmed by a failed product will have means for restitution.