Could the CFPB create its own regulatory sandbox?
Having discussed how the Bureau of Consumer Financial Protection (CFPB) could potentially help facilitate state regulatory sandboxes, the…
Having discussed how the Bureau of Consumer Financial Protection (CFPB) could potentially help facilitate state regulatory sandboxes, the next logical question is whether the CFPB could establish its own sandbox. Yes, the CFPB has Project Catalyst and a no-action letter policy, but as critics have pointed out, these efforts may not provide sufficiently broad and certain regulatory relief and may be too hard to access (p 83–84). This frustrates the potential for firms to test new products in good faith, and potentially denies consumers the benefits of innovation.
So could the CFPB do more? Could it, with the powers it has now, create an apparatus to give companies who want to test innovative products and services real certainty that they would not face regulatory sanction? Well, maybe, kinda.
As discussed previously, the CFPB can exempt, conditionally or unconditionally, entities covered by Title X of Dodd-Frank from its provisions via rule. As with hypothetical state regulatory sandboxes, the CFPB could condition exemption on a company meeting certain criteria. These criteria could include things like:
1. The company only offering a particular product to a limited number of customers who are aware they are using an experimental product.
2. The company agreeing to properly compensate any customers harmed by the product or service violating consumer protection law.
3. The company having sufficient resources and a credible plan to compensate those customers.
4. The company disclosing certain information to the CFPB during or after the trial to help educate the CFPB.
To make the sandbox attractive to companies, and therefore useful to the public, the CFPB would need to bind itself via rule as well. Requirements should at a minimum include:
1. The CFPB cannot bring an enforcement action for activity conducted in accordance with the requirements of the sandbox.
2. The company will have immunity for any inadvertent violations of consumer protection law revealed by the data it shares with the CFPB, provided the company compensates the harmed customers, if there are any.
3. An agreement to treat the data as confidential and to not publicize inadvertent violations of consumer law provided the company makes any harmed customers whole.
4. Limits on how the CFPB can use the data it obtains from sandbox participants to prevent abuse and encourage companies participating.
5. An agreement that if the CFPB chooses to bring an enforcement action against the company the company gets to elect whether the action is brought in court or via administrative proceeding.
6. In the event the CFPB brings an enforcement action against the company for activity in the sandbox and loses, the CFPB will pay the company’s attorney’s fees.
Of course, even if the CFPB were to pursue this idea there are real potential limitations. First, the CFPB can only exempt companies from Title X of Dodd-Frank, not all federal consumer protection laws, and while the CFPB is the primary enforcer of those laws, other federal regulators, the Department of Justice, private parties, and possibly the states could also bring suit. While the CFPB could enter into agreements with other agencies, it is unlikely there would be complete coverage. Further, private rights of action could not be foreclosed in this manner.
The second potential issue is state law. Just as a state sandbox is less valuable if there is a risk of inconsistent federal enforcement, risk of state liability diminishes the utility of a federal sandbox. While some states may enter into agreements with the CFPB, others may resist. This would force the CFPB to try and preempt the law of those states if it wanted a truly national experiment.
Dodd-Frank stipulates that it only preempts state law to the extent state law is inconsistent with its provisions; state laws that provide “greater” consumer protection are not deemed to be inconsistent. As such, to preempt state law for the purposes of facilitating a national sandbox, the CFPB would have to show that consumers were receiving at least equal protection. Fortunately for the CFPB, it can make a determination whether a state law is inconsistent via rule. Unfortunately for the CFPB, that determination would need to survive judicial review, and blanket preemption of state law may not be possible.
However, to the extent the CFPB does wish to preempt state law it could have a credible argument that preemption of state law to support a sandbox is consistent with Dodd-Frank’s requirements. First, if a requirement of the sandbox is that the firm notify potential customers that the product is experimental and is required to make consumers whole from any violation, consumers have significant protection equal to what could reasonably be expected from other laws. The actual consumer is no worse off for being part of the experiment in which she agreed to participate.
Second, the nature of the sandbox undercuts arguments that punitive state law is necessary to protect consumer generally, not just those in the sandbox. Punishment (punishing an actor because her act was bad regardless of the actual damage caused) and deterrence (sending a warning to other, similarly situated actors) are not appropriate for firms in the sandbox. After all, these firms are agreeing to work with the government to try something new and stand ready to make harmed parties whole. This cooperative approach is hardly “bad behavior” or the type of conduct the government should want to discourage. Preventing states from piling on punitive action does not result in less protection.
Third, innovation and competition can help protect consumers. The best way to address a financial services market that excludes or ill-serves consumers is to facilitate a better market. Allowing for experimentation can help lead to that better market, and in turn a more protected consumer. State laws that impede these efforts may cause more harm than good.
The CFPB could make a plausible case that a sandbox was at least as protective of consumers as existing state law, and therefore state law could be inconsistent and preempted. Would this likely be litigated? Yep. Would the CFPB win? Possibly, but it is by no means a slam dunk. Still, nothing ventured, nothing gained.
Innovation can be a powerful force for improving the financial lives of consumers, and providing reasonable regulatory relief is an important tool to encourage it. A federal regulatory sandbox would no doubt benefit from changes in the law. However, it is possible that the CFPB could use its existing authority to create something that, while not perfect, is at least useful. That is something worth considering.