The Financial Services Innovation Act, introduced by Congressman Patrick McHenry (R-N.C.) last fall, remains in contention for a hearing this year. The bill is designed to promote innovation in financial products without fear that regulators will make companies unnecessarily tap the brakes.
Less controversial than the OCC’s proposed fintech charter, passage of the bill would create a Financial Services Innovation Office (FSIO) that works with all major financial regulatory agencies. Any company – bank or otherwise – tinkering with financial innovation could petition the appropriate regulator to modify or even waive rules that would apply to a new product or service. The company would have to demonstrate the product has the potential to serve the public without posing risk to the financial system or consumers. The agency would have 30 days to review the petition and either approve or deny. If the petition is accepted, the agency and the business would enter into an Enforceable Compliance Agreement, or ECA, that would establish a compliance plan. The ECA would be applicable across regulatory agencies and state lines.
There is currently a process that allows for this, but is considered by many to be flawed and far too lengthy to be useful in the rapidly evolving tech world.
The United Kingdom passed a similar law two years ago, which influenced the bill’s nickname: “The American regulatory sandbox.” Known officially in the UK as Project Innovate, their program falls under UK’s main regulatory agency, the Financial Conduct Authority. Reports from various news outlets in the UK give the effort somewhat mixed reviews. Criticism has come not so much over whether the rules were overly restrictive or too loose, but because too few companies took the opportunity to gently bend the rules while pursuing innovative products. Those that did, however, offered predominantly positive feedback to the FCA concerning the utility of the program.
The American Bankers Association has stated the bill aligns with the “group’s broad principles for supporting fintech innovation.” The bill focuses on activities, not on charter type; it is based on up-to-date laws; and it offers a space to experiment. ABA said its experts consulted with McHenry’s staff as the legislation was being drafted.
ABA’s Robert Morgan, vice president of emerging technologies, said the group remains in support of the concept but has a small issue with its nickname.
“The term sandbox is thrown around a lot when calling for testing ground for new products, but I think a greenhouse is a better analogy,” Morgan said. “A greenhouse provides shelter for seedlings of ideas, giving them the right level of attention and oversight with a plan to introduce them to the real world as they develop. An effective testing ground for new products should facilitate development of products and services that have real world applicability with a development plan for a full roll-out to real customers.”
Morgan said McHenry’s bill “is an important step toward creating such a testing ground that would help both banks and nonbanks roll out innovative products and partnerships.”