Regulators create sandboxes to promote FinTech


Sandboxes are the hottest trend in financial regulation. Or rather deregulation. China, Singapore, Australia, Canada and more than 20 other countries have it. US regulatory agencies are launching them. Arizona has one, and other states can follow suit.

Sandbox programs are meant to be a kind of safe space for digital entrepreneurs to test products without regulators taking a deep breath. Governments are ready to stay in the hands of regulation as startups that emerge from such experiments could lead to new jobs and expand access to financial services. They also provide competition to the big banks. There’s even a sandbox for sandboxes: Regulators in 12 countries have agreed to experiment with fintech across borders.

But as sandbox initiatives proliferate, critics fear the concept has become a covert effort to override consumer protection laws. “Why allow companies that are not ready to provide financial services to the public to do so?” said Maria Vullo, who resigned Feb. 1 as superintendent of New York’s Department of Financial Services, the state’s main financial watchdog. Lauren Saunders, associate director of the National Consumer Law Center, says the movement “has taken a wrong turn in this era of deregulation” under President Trump. In the United States, she says, sandboxes are not “designed as a way to help businesses comply with the laws, but to get relief from the laws.”

A proposal Sandbox of the Office of Consumer Financial Protection is perhaps the most striking effort. Congress created the CFPB as part of the Dodd-Frank Financial Reform Act of 2010. Its mission is to crack down on deceptive or unfair consumer credit practices. Some of them, like predatory mortgages, helped trigger the 2008 financial crisis. The agency was designed to fill what was perceived to be a gap in existing regulation and law enforcement.

But companies approved for the CFPB sandbox would come under a powerful protective umbrella. While a December proposal states that applicants should show how they plan to control risks to consumers and reimburse customers who may be harmed, approved businesses would be partially immune from enforcement action by any authority. federal or state and lawsuits by private parties. The safe harbor would extend to consumer protection laws that prohibit discrimination in lending, limit consumers’ liability for unauthorized credit card charges and require plain English explanations of real estate transactions. The agency says it plans to invite trade associations to seek sandbox approval for entire industries.

Paul Watkins, who heads CFPB’s Office of Innovation and will lead the agency’s sandbox if approved, said in a January podcast that “innovation is part of protecting consumers – these things are not opposed ”. The program, he said, will achieve the office’s broader objective, “which is to ensure competition in markets and to secure consumer access.”

Twenty-two attorneys general and a coalition of 50 public interest groups are fighting this idea. People have “starry eyes when they hear the word ‘innovation’,” says Saunders, “but radically innovative products require more supervision, not less.” She cites the now-banned practice in which banks would automatically grant overdraft protection to debit card customers and then charge $ 40 when an account ran out of funds for a $ 2 cup of coffee.

The U.S. Office of the Comptroller of the Currency is considering a sandbox program for the national banks it regulates, but it has already paved the way for fintechs that don’t take deposits to receive special national bank charters. While the OCC is no exception to banking rules, it will adapt them to the size, risk and complexity of any newly licensed company. And the OCC would be ahead of the states, normally the supervisors of non-depository financial institutions. “Ten years ago, we went through a crisis because the relaxation of regulations allowed institutions to take risks to the detriment of the consumer,” said Vullo, the former New York regulator. “It’s like people have amnesia.”

Bryan Hubbard, a spokesperson for the OCC, says it is “misleading to suggest that consumer protection would suffer” if a fintech company were given a federal charter. The OCC, he said, would conduct banking reviews of FinTech companies to prevent abuse.

The sandbox movement took off after the UK’s Financial Conduct Authority coined the phrase to describe its program, launched in 2016, to encourage innovation and competition. Since then, FCA has enabled 89 companies to test their concepts in the market. According to a Deloitte report, the UK initiative’s greatest achievement “may have been to shatter the myth that regulation is a barrier to innovation.”

The Trump administration has learned a different lesson: in a July Report, Treasury Department urged states to create sandboxes as a “unified solution” for what they see as regulatory overkill after the crisis. If states don’t, the report says, Congress should step in and anticipate state laws.

Even without a sandbox, there is no shortage of fintech startups. The Treasury report says more than 3,300 fintech companies started from 2010 to 2018. Investor funding for these companies has grown rapidly, reaching $ 22 billion globally in 2017, a 13-fold increase since 2010. Loans Fintech now account for over 36 percent of all personal loans in the United States, up from less than 1 percent in 2010. Some digital financial services reach up to 80 million people, the report says.

Three days after the Treasury report, Arizona sandbox open to fintechs that provide a service to consumers – online loans, mobile payments, cryptocurrency products, bot advice – not available in the state. Accepted businesses can serve up to 10,000 customers and operate for two years without a license, after which they must obtain approvals or cease operations.

Sweetbridge NFP Ltd., a fintech from Scottsdale, Ariz., Is one of three companies that have been approved. It plans to convert the value of vehicle titles into digital tokens that customers can redeem, borrow and lend. The Arizona Attorney General’s Office website describes the trial as a “blockchain-enabled product designed to purchase finance without a credit check and provide affordable, user-friendly vehicle title loans.”

Title loans allow car owners to access quick cash by placing the title of their vehicles as collateral. Since 2010, when the state banned payday loans, auto title lenders have exploded in Arizona. In 2015, the state had more than 630 securities lending outlets – one for every 8,000 people – according to a report by the Consumer Federation of America.

For the sandbox program, Sweetbridge will rely on insurance data and automatic values ​​from Kelley Blue Book rather than credit checks and other traditional underwriting tools. He agreed to cap his loans at an annual interest rate of 20 percent – below what most securities lenders charge. Sweetbridge’s test, which is expected to begin soon, will also limit loans to 20% of a vehicle’s value. Scott Nelson, Founder and CEO of Sweetbridge, said in an email that Arizona’s sandbox allows startups to quickly test products “in a controlled environment without the usual costs and delays to license new ones. financial products”.

If successful, the company plans to offer the securities lending product more widely. A CFPB February 6 announcement could make this easier. The agency said it plans to rescind the part of the Obama-era rules that required payday and auto-title lenders to determine the likelihood of a client being able to repay a loan. Sweetbridge says its loans will not be available in the UK and Europe, where such assessments are needed.

Jean Ann Fox, former director of financial services at the Consumer Federation of America, says she has tried unsuccessfully to find out whether Arizona’s sandbox products actually work and under what controls, what state laws have been lifted and whether the entities have been lifted. asked to post bonds in case they had to reimburse customers. “It’s not so much a sandbox as it is a black box,” says Fox. Katie Conner, spokesperson for the Arizona attorney general’s office, which oversees the program, says it’s “the absolute last place any deceptive gamer would want to be.” Of the three approved companies, only Grain Technology Inc. has started offering its product and on a limited basis – personalized savings and credit plans through existing bank accounts. “These companies have been in the sandbox for less than four months – things are just getting started,” she adds.

For now, the Arizona trials can only be offered to consumers in the state. But the state could expand its reach by requesting admission of its sandbox to the CFPB if the agency goes ahead. It might not be difficult: Watkins, who would manage the CFPB sandbox, led the design effort for the Arizona one.

The Treasury has proposed sandboxes to encourage innovation in financial technology. But even without them, there have been over 3,300 startups since 2010.

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