ibelieveicanfly / AdobestockIn an effort to foster innovation in financial services, the CFPB is reinstituting its programs that allow companies to obtain regulatory safe harbors through no-action letters and sandboxes to test new products and services.
The CFPB had such programs during the first Trump Administration, but the Biden Administration scrapped them, saying that they were ineffective and unfair. In addition, “The CFPB also determined that the existing policies failed to meet appropriate standards for transparency and stakeholder participation,” bureau officials said.
In describing the new sandbox program, the CFPB said, “By operation of the applicable statutory provision, the recipient has a safe harbor from liability under the relevant statute, to the fullest extent permitted by these provisions, as to any act done or omitted in good faith in conformity with the Approval.”
To obtain the rights to a sandbox, companies must demonstrate that they will promote innovations that solve unmet needs. In addition, they must not compromise the competitive process. To help accomplish that goal, the CFPB will not approve a no-action letter or sandbox on a topic to a single firm and it will reach out to program applicants’ competitors and invite them to apply with respect to the same approval topic.
Companies are prohibited from advertising the receipt of sandbox privileges or no-action letters.
In explaining the no-action letters, the CFPB said they are designed to ensure that recipients promote innovations that solve unmet needs in consumer financial products and services. Minor adjustments to existing products or services would not qualify for such privileges, according to the bureau.
Companies risk the revocation of sandbox rights or no-action letters if they change the product or service that qualified for the privileges, the bureau said. Sandbox approvals and no-action letters will expire in two years, although recipients of sandbox approvals can apply for an extension. Recipients of sandbox approvals and no-action letters will be required to consent to the CFPB’s supervisory examination authority, if the recipient is not already subject to this authority. This may discourage non-supervised parties from seeking sandbox approvals or no-action letters.
The bureau said that in an effort to “promote transparency and rigorous ethical standards,” the CFPB will post applications for privileges on an open docket and will accept comments for 60 days.
The CFPB said it will not consider applications from former CFPB attorneys who are now representing firms as outside counsel. Bureau officials said they are concerned that former CFPB employees would use their relationships to obtain special treatment in the no-action letter program. They also said they are concerned that it might appear that those attorneys received special treatment.
In addition, companies that have been prosecuted for violations of consumer financial law during the past five years are not eligible for the program.
The terms of both programs provide that submitting no-action letter or sandbox applications under false pretenses, or with misleading or incomplete information, may be a violation of law and may be referred for potential prosecution. Query whether this may discourage parties from applying, fearing an application that they consider to be accurate and complete will be deemed to be misleading or incomplete.
Coming soon before Donald Trump becomes President, the future of the two programs is uncertain. The first Trump Administration established no-action letter and sandbox programs under different terms, and the incoming administration opposes the work of current CFPB Director Rohit Chopra. If the Trump Administration does not like the design of the programs, it could easily revise or terminate them, since they have not gone through the formal regulatory process.
