Will the Biden CFPB clamp down on innovation and regulatory sandboxes?

In his confirmation hearing, Rohit Chopra, President Biden’s nominee to head up the Consumer Financial Protection Bureau (CFPB), strongly signaled that things would change under his watch. After a perceived abdication of responsibility by the Bureau during the Trump administration, he expects the agency to become more aggressive when he takes control. However, presumptive Director Chopra should pay careful attention not to throw one thing out with the bathwater: the Bureau’s increased openness to innovation.

Dating from Director Richard Cordray and increasing under Director Laura Kraninger, the Bureau has supported innovation, both among market participants and among the states. The states, through the use of regulatory innovations like regulatory sandboxes, have worked hard to make their markets friendlier to innovation and competition. In many cases, their efforts show particular promise.

But the Bureau could stymie this work if it isn’t careful. Such an outcome would not only frustrate constructive federalism, but also the Bureau’s own mission of promoting competition that benefits consumers.

A regulatory sandbox is a regulatory environment that attempts to solve some of the problems that occur when policies designed in another era struggle to keep up with the increasing pace of innovation. It allows firms to offer new products or services under modified rules while still under the supervision of the relevant regulator. They make the most sense in industries like financial services, which are both heavily regulated and have high barriers to entry into the marketplace. 

There is early evidence that regulatory sandboxes can increase investment in new products and services. In particular, they can help new firms that face the type of uncertainty that comes with trying to introduce a mold-breaking product or service while complying with the law.

Far from being a lawless zone or “the wild west,” regulatory sandboxes entail enhanced oversight. They offer regulators themselves an opportunity to get a better understanding of where markets are going, rather than having to play catch-up when something breaks down.

With these potential benefits, it is no wonder that so many jurisdictions have adopted sandboxes. As of November 2020, there are at least 73 sandboxes within 57 countries. Numerous states – including Arizona, Utah, Wyoming, Florida and West Virginia – have adopted sandboxes, with other states seriously considering them.

To be sure, there are risks, but those can be mitigated with proper design and execution. State legislators and regulators are well positioned to adapt sandboxes to address the needs and risks of their own environments. There is also a risk to doing nothing, especially for those poorly served by the status quo.

What does this have to do with the Bureau? Everything.

Because the Bureau enjoys broad and overlapping regulatory authority with the states, its cooperation is essential to allow sandboxes to function properly. A state granting limited regulatory relief does a firm no good if they will still face federal sanction. Not only would CFPB sanction harm the firms, but it would also serve as a slap in the face to the state regulators who oversee these initiatives.

This is why it is important for the Bureau’s new leadership to make clear that they respect their state partners and will not interfere with regulatory sandboxes and similar state efforts.

Rather than impede the states, the Bureau should double down on supporting them, working with them, and using the data obtained from state sandboxes to inform policy making. Doing so will help the Bureau pursue its mission to protect consumers, both by preventing bad acts and by encouraging competition and innovation — which, in the long run, has the best chance of permanently improving the quality of financial services available to consumers. 

Brian Knight is the director of innovation and governance and a senior research fellow at the Mercatus Center at George Mason University.