On Tuesday, the Consumer Financial Protection Bureau (“Bureau”) published a revised No Action Letter (“NAL”) policy aimed at offering financial innovators an avenue for obtaining more regulatory certainty before introducing new products and services. The Bureau paired its release of the revised NAL policy with an announcement of two new, related policies: one aimed at offering protection to the same innovators by allowing them to test new products in a controlled, “sandbox” environment; and one offering protection for products and services described by “trial disclosures.” Recognizing that financial companies with new offerings face regulatory risk at the state level as well, the Bureau separately announced a new partnership with State Attorneys General designed to promote innovation.
A. Revised “No Action Letter” Policy
The new NAL Policy is the Bureau’s second attempt to implement a workable “no action” process along the lines of the practice that has worked well for years at other regulatory agencies, such as the Securities and Exchange Commission. In general, a “no action” policy is intended to offer an industry a procedure for obtaining some certainty, in advance of introducing a new business practice, that the regulator will not challenge the practice as unlawful in supervision or enforcement proceedings. The industry applicant generally obtains that assurance by having counsel describe the practice, and why it is beneficial rather than harmful, in writing to the regulator, who can then respond that the agency will take “no action” if the practice is adopted as described.
The Bureau’s initial NAL Policy, published in 2016 when President Obama’s appointee, Richard Cordray, headed the agency, resulted in only one no action letter. Critics cited several problems with the original policy, including that: a NAL would be revocable at any moment, undermining its main benefit; the policy contemplated making many public — and therefore available to plaintiffs’ lawyers — many materials from the process, including NAL applications and denials; and the policy also permitted the Bureau to make ongoing, invasive data requests from the applicant even after issuing a positive letter.
The revised NAL Policy, according to the Bureau, offers industry “a more streamlined review process.” At 67 pages, however, the Policy is worthy of close study. The Bureau also released an initial, positive no action letter under the new Policy, responding to a request from the Department of Housing and Urban Development (and others) that the Bureau take no action under the Real Estate Settlement Procedures Act’s anti-kickback prohibition regarding certain fee-for-service arrangements between housing counselors and lenders.
B. “Trial Disclosure Program” and “Compliance Assistance Sandbox” Policies
In connection with the revised NAL Policy announcement, the Bureau also finalized two other policies intended to allow innovators to introduce new financial products, in consultation with the Bureau, on an initial, limited basis without fear of supervisory or enforcement action: a Trial Disclosure Program (“TDP”) Policy, and a “sandbox” initiative called the Compliance Assistance Sandbox (“CAS”) Policy.
C. New Partnership with State Attorneys General
On the same day that the Bureau unveiled its three new policies, the agency also announced the creation of a partnership with certain state regulators. The Bureau describes this partnership — called the “American Consumer Financial Innovation Network,” or “ACFIN” — as one that is open to all state consumer financial regulators, but to date the agency has signed up only Attorneys General elected as Republicans in seven states, none of which are generally viewed as “high risk” states in terms of regulatory risk (Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah).
ACFIN’s purpose, according to the Bureau, is to “enhance coordination among federal and state regulators to facilitate financial innovation.” In theory, such coordination could bring more consistency and certainty to the consumer finance industry. In practice, however, state regulatory oversight and enforcement, and private plaintiff litigation, will continue to present challenges to fintech companies and others trying to chart a course in an uncertain regulatory environment. It remains to be seen whether the Bureau and state regulators can work together to agree on standards that apply to consumer financial services innovators.