Fintech Bill Would Create Regulatory Sandboxes for New Products

By Gregory Roberts

Sept. 23 — Regulators could temporarily waive some rules for financial technology firms working on new innovations, under legislation proposed by Patrick McHenry (R-N.C.)

This regulatory sandbox, which McHenry dubs “permanent beta” is designed to provide fintech entrepreneurs more freedom to try out a new idea without becoming entangled in what may be ill-fitting regulations. Fintech companies have complained that the U.S. lags the U.K. and some other countries in encouraging innovation by that means.

“The door would be open, rather than closed, to innovators,” McHenry told a fintech conference in Washington Sept. 22, the day he introduced the proposal. “Regulation as usual in Washington simply will not work in the digital age.”

McHenry's bill is unlikely to pass the current Congress before it concludes at the end of the year, but the measure could shape future discussions around a sandbox.

Beyond No-Action Letters

Some U.S. regulatory agencies, such as the Securities and Exchange Commission (SEC) and the Consumer Financial Protection Bureau (CFPB), have policies allowing them to issue no-action letters, which confer some protection from regulations. But McHenry says those letters are of limited value because they are not legally enforceable, can be revoked by the agency at any time and do not affect actions by any other agency.

McHenry's bill (H.R. 6118) would set up something called an enforceable compliance agreement. The agreement could be offered by any of a dozen agencies named in the bill to an applicant who files a petition. The petition would spell out what new product or service the applicant wants to test and what regulations should be relaxed to promote the effort.

The petitioner also must show that if allowed to go forward under the looser regulatory structure, the innovation will serve the public interest, expand access to financial services and promote consumer protection, without exposing the financial system to risk.

30 Days to Reply

The agency would have 30 days after a comment period to reply. If it denies the petition, it must explain why in a cost-benefit analysis (and during the review period, the agency could not take enforcement action against the applicant). If approved, the agreement would shield the innovator from regulation by any of the 12 agencies. But if the innovator fails to live up to the agreement, the agency can cancel it.

Anyone seeking regulatory relief for a fintech innovation, from the largest bank to the smallest startup, could file a petition. Each agency must set up a Financial Services Innovation Office to accept petitions and encourage innovation generally, and a joint liaison office would coordinate among the agencies. Twice a year, each FSIO must identify regulations it is considering modifying for the program.

“It's a quantum leap forward in how America regulates its financial services,” McHenry said of his proposal.

McHenry has taken an active role in introducing legislation under the Innovation Initiative, a loosely defined program of the Republican majority in the House to foster technological experimentation and development.

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To contact the editor responsible for this story: Seth Stern at

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