On August 3, 2018, Arizona began accepting applications for its regulatory sandbox that “enables a participant to obtain limited access to Arizona’s market to test innovative financial products or services without first obtaining full state licensure or other authorization that otherwise may be required.” In March 2018, Arizona’s Governor signed into law legislation directing the state’s Attorney General to create the sandbox. The Attorney General is also responsible for the application process and oversight of the sandbox.
To be considered for admission, applicants must complete the nine-page application and pay a $500 application fee. Each application must be for an innovative financial product or service as defined by the enabling legislation. For example, products or services regarding most types of credit extending services, such as peer-to-peer lending and online marketplace lending, and innovative products and services for money transmission and investment management would be eligible. However, “securities trading, insurance products, or services that provide solely deposit-taking functions” are not eligible products.
Applicants must provide details regarding the innovative financial product or service, the testing plan, a “Consumer Protection Plan,” and exit plan. For the Consumer Protection Plan, applicants must identify the targeted consumers; how the applicants plan to market to those consumers and disclose their participation in the sandbox; the key risks to consumers; the plan to address the risks; and how the applicants will monitor and assess the testing of the product or service to protect consumers in the event the test fails.
The Attorney General has indicated that he will take a holistic approach to determine the applicant’s ability to conduct a test that does not place undue risk on consumers. The Attorney General may consider factors such as “capitalization; insurance or bonds and their terms; compliance or legal support; accounting practices; cash on hand; and the number and expertise of active advisors and key personnel.” A weakness in any one area will not necessarily prevent an applicant’s admission into the sandbox. Applicants will be notified of a decision within 90 days of submitting the application and payment.
The CFPB recently named the sandbox’s architect and former head of fintech initiatives at the Arizona Attorney General’s office, Paul Watkins, as Director of the Bureau’s Office of Innovation. See our blog about Mr. Watkins. In June 2018, Ballard Spahr attorneys held a webinar, “The Regulatory Sandbox – What it Means for Fintech Companies,” in which the topics included a discussion of the concept of a regulatory sandbox, the benefits and risks associated with using one, and what a possible sandbox created by the CFPB might look like. Mr. Watkins was one of the webinar speakers and discussed the Arizona initiative. We have also previously blogged about Arizona’s regulatory sandbox.