Republican Congressman Patrick McHenry, Vice Chair of the House Financial Services Committee, has introduced the “Financial Services Innovation Act of 2016,” which is intended to provide a streamlined regulatory process for innovative fintech products and greater certainty about compliance requirements.
The federal agencies covered by the bill include the CFPB, Federal Reserve, FDIC, NCUA, OCC, FTC, and HUD. The bill would require each agency to publish in the Federal Register within 60 days of enactment and biannually thereafter a list that identifies 3 or more areas of existing regulations that apply or may apply to a “financial innovation” and that the agency would consider modifying or waiving if it received a petition as contemplated by the bill. “Financial innovation” is defined as “an innovative financial service or product, the delivery of which is enabled by technology, that is or may be subject to an agency regulation or Federal statute.”
The bill contemplates that each agency would establish a “Financial Services Innovation Office” (FSIO) to support the development of financial innovations. The FSIO would consider petitions from persons that offer or intend to offer a financial innovation and seek to enter into an “enforceable compliance agreement containing a modification or waiver of an agency regulation or Federal statutory requirement under which the agency has supervisory or rulemaking authority with respect to the [petitioner] or a financial innovation the [petitioner] offers or intends to offer.”
While a petition is pending, the bill would create a safe harbor barring the agency from bringing an enforcement action relating to the financial innovation that is the subject of the petition. The agency would be required to publish the petition in the Federal Register and provide a 60-day notice and comment period. If the agency disapproves a petition, it would be required to provide the petitioner with a written notice that explains why the petition was rejected.
If a petition is approved, the petitioner would be able to enter into an “enforceable compliance agreement” with the agency that includes “the terms under which the [petitioner] may develop or offer the approved financial innovation to the public and any requirements of the [petitioner] and any agency with respect to the financial innovation.” The agreement would also bar other agencies from bringing an enforcement action against the petitioner with respect to the financial innovation that is the subject of the agreement. States would be barred from bringing an enforcement action if the petitioner has provided the state with a copy of the compliance agreement and a statement of policies and procedures the petitioner has in place to comply with applicable state laws. Notwithstanding this limitation, the bill would allow a state to bring an enforcement action if a court were to determine “that the agency’s action was arbitrary and capricious and the financial innovation has substantially harmed consumers within such State.”
The bill does not appear to provide a safe harbor from civil litigation. However, it provides that a petitioner “can elect to arbitrate any action initiated by another person relating to a financial innovation that is the subject of an enforceable compliance agreement.” It is unclear whether this provision would trump the CFPB’s arbitration rule once it is final and effective. Under the CFPB’s proposed rule, a class action waiver in an arbitration provision in a consumer financial services agreement would be invalid.
In November 2012, the CFPB launched “Project Catalyst,” an initiative for facilitating innovation in consumer-friendly financial products and services. Under Project Catalyst, the CFPB finalized a trial disclosure policy in October 2013 for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures. In February 2016, the CFPB issued a final policy statement on issuing “no-action” letters (NAL) for innovative financial products or services. We have found the CFPB’s NAL policy to be lacking in many important respects.
By recognizing the need to create a more flexible regulatory environment for fintech innovations, Congressman McHenry’s bill appears to be a step in the right direction.